Being in a position where you’re unable to pay your company’s creditors is extremely stressful. In an attempt to avoid increasing the level of debt, many companies try to negotiate directly with their creditors and agree to an informal arrangement.
If the debt is quite small and owed to one creditor, and the creditor is being cooperative, entering into an informal debt arrangement is probably the best solution, rather than searching the web for ‘an insolvency practitioner near me’. It can be kept simple but there is a risk for both parties as the agreement is not legally binding.
On the other hand, if there are multiple creditors and the level of debt is large, creditors may not be so willing or cooperative. In order to avoid liquidation or bankruptcy, it is better to hire an insolvency practitioner to draw up formal proposals and negotiate with creditors on your behalf.
Informal company arrangements – the risks
An informal company arrangement is an agreement between a company and its creditor. Whilst it is a way to manage debt, there are significant risks involved with this type of debt arrangement.
If a creditor is willing to enter into an informal arrangement (IA) whereby the debtor has agreed to make regular, if lower, payments to repay the debt, it’s important to stick to the agreement. That said, the creditor does not have to accept the IA. The likelihood of a creditor accepting your proposal when it’s an informal arrangement is much lower than it would be if it was proposed by a licensed insolvency practitioner.
The added risk is that a creditor is able to change their mind and they are not legally obligated to stick to the agreement. IAs are not legally documented in writing; there are no binding contracts. Therefore, the creditor is within their rights to back out of the agreement and petition the courts for your company to be liquidated at any time.
Formal company arrangements – the safer option
A formal arrangement that has been proposed by an insolvency practitioner on your behalf, and agreed by a creditor, provides a much safer option. It will put you in a better position with regards to legal action against you should the creditor subsequently petition for liquidation.
Many people turn to the internet when searching for an insolvency practitioner near me because they’re experienced in drawing up favourable terms for both parties for formal debt arrangements. They are able to negotiate with the creditor on your behalf, draft the proposal to put to the creditor and agree terms that are mutually beneficial. The proposal is a written document that protects the debtor and the creditor. As long as the payments are maintained on a regular basis, generally there is no need to revisit the arrangement.
Alternative voluntary debt arrangements
Your insolvency practitioner may suggest alternative voluntary debt arrangements that may be a better option for insolvent companies, such as aCompany Voluntary Arrangement (CVA).
A CVA is a good alternative to trying to arrange an informal agreement with your creditors. It will protect your company from legal action or undue pressure from creditors that have agreed to the CVA, unless the terms of the CVA are breached. Because it is a legally binding agreement, and as long as the proposal has been agreed by all the creditors, the company can continue to trade. The insolvency practitioner continues to oversee the CVA, which is usually for a term of 3 to 5 years, until it comes to an end. Advantages of a CVA include:
- Stopping the pressure from creditors and HMRC.
- Stopping a winding up petition threat.
- Bringing money owed to creditors into one monthly payment to the supervisor, the insolvency practitioner.
- Costs less than administration or a Scheme of Arrangement.
- Will improve cash flow and allow the company to continue to trade.
Choosing an insolvency practitioner
The first job is to ensure that the insolvency practitioner near you is licensed and is a member of one of the Recognised Professional Bodies (RPBs) in the UK, which are:
- Insolvency Practitioners Association
- Institute of Chartered Accountants of England and Wales
- Institute of Chartered Accountants in Scotland
- Institute of Chartered Accountants in Ireland
Only licensed insolvency practitioners are allowed to act in insolvent company and bankruptcy proceedings, including acting as a liquidator, an administrator or a supervisor of a CVA.
It’s important to ensure during the first conversation with your chosen insolvency practitioner (IP) they have the relevant experience in acting in voluntary debt arrangements. Always ask about their fees. Whilst many IPs will offer the first consultation on a no obligation, free of charge basis, they will charge for their ongoing services. They should always be able to provide you with an estimate of the costs involved but remember, choosing the cheapest option is not always the best course of action. Ultimately, you must trust the IP you choose as you will be working with them for a long period of time.
Key aspects that will help you choose the right IP for you, your company and your circ*mstances include:
- Good communication – the better the communication between you, your IP and your creditors, the more successful the outcome. The IP has to be able to effectively and clearly converse with company directors, stakeholders, creditors and officials.
- Understand your business – every business is different, with varying
- Processes and procedures – Whilst many debt problems are similar, such as difficulties in paying creditors or HMRC, a good IP will take the time to listen and understand the specific problems of your business.
- Trustworthy – an IP should be open, honest, act with integrity and transparency. Gaining the trust of all parties involved is key to agreeing the best voluntary arrangement.
- Experience – the more experience the IP has in a specific sector, the more quickly the matter can be resolved.
- Professionalism – a good IP is approachable and professional. They should be adept at handling sensitive issues, such as accusations of wrongful trading, and be able to resolve any disagreements in a calm manner.
If your business is struggling with debts or you are thinking of winding up a solvent company voluntarily, the first step is to seek professional advice. Our highly experienced professionals at Leading are on hand to help and advise on the process.
