In these parlous economic times, more businesses are facing increased financial pressure, resulting in periods of stressful trading. In such cases, consideration needs to be given to the development of a sound strategy that allows the company to successfully continue to trade and pay its creditors.

The purpose of this article is to address some of the “tools” available to assist directors in the restructuring of a company.

“Cash is king” is a phrase we have all heard before. A steady and predictable cash flow is at the heart of the ongoing success of any business. Without it – no matter how good the company, its managers and products – the company will be unable to pay its creditors and, absent any strategy designed to address this issue, will invariably result in the company failing.

Up-to-date management accounts and accurate cash flows are required to aid any restructuring to see where overhead reductions can be made and where, and when, revenues result.

Discussions with funders should be entered into at an early stage to ensure their ongoing and continued support. An early dialogue backed with accurate financial information will usually result in temporary support even where refinancing is required. Proper and up-to-date information relating to a company’s finances, products/services and its business plan will prove invaluable in accessing new forms of finance at the correct levels.

Informal negotiations with creditors, with a view to consolidating existing or historic debt may be considered. However, such informal agreements do not legally bind creditors and it will only take one dissenting creditor to unilaterally break ranks for such an arrangement to fail.

Alternatively, if a company is struggling to pay its debts, but the underlying business is sound, a more formal consolidation of existing and historic debts through a Company Voluntary Arrangement (“CVA”) can be proposed. A CVA is a legally binding agreement between a company and all of its unsecured creditors. It is usually for a period of between 3 to 5 years and must propose a better realisation for creditors than would be achieved if the company were to enter into insolvent liquidation. In order for a CVA to succeed, the underlying business must be sound enough to support continued trading and to produce sufficient funds to service the CVA payment obligations as well as ongoing trading commitments. Once approved, it becomes a contract between the company and its creditors. However, a CVA cannot adversely affect the rights of secured or preferential creditors without their express consent.

The disadvantage of any CVA is that, save for what are described as “small companies,” there is no moratorium on creditors taking action to enforce their debt whilst the CVA is being approved. A “small company” is defined as a company that can satisfy two or more of the following requirements: (i) turnover does not exceed £6.5 million; (ii) balance sheet total does not exceed £3.26 million; and (iii) has no more than 50 employees.

In cases where the small company moratorium will not apply it is necessary to consider whether an administration is required (in order to obtain the protection of a statutory moratorium), either as a stand-alone process, or with a view to entering into a CVA. The moratorium will provide protection from creditor action whilst the purpose of, either the survival of the company, or its business is achieved.

Take early advice from a qualified professional experienced in restructuring: early advice results in a much better prospect of survival, the protection of jobs, protection of assets and ultimately the success of the business.

The golden rule of corporate recovery is, do not bury your head in the sand. The earlier you start to deal with issues, the more options you will have to successfully trade the company out of financial difficulties.

Courtesy of Thames Valley Business Magazine July/August 2012