What does ‘trading out of insolvency’ mean?
‘Trading out’ of insolvency is a term is used to describe the process by which a company with a negative cash flow establishes a strategy to survive. This can either be an informal arrangement with creditors or a formal plan worked alongside insolvency practitioners. Either way, the business must be viable, meaning that it has a chance of a strong financial future.
Trading out of insolvency can provide flexibility, however, company directors must be aware that more action may be taken further down the line should it not be successful, and this could result in insolvency, where a business would then need to enter a process such as administration or even liquidation.
Trading after liquidation
Once a business has entered liquidation, it can no longer trade. Directors must always put the creditors’ interests first, meaning that trading should be stopped immediately after the business crosses over the insolvency line. If a company continues to trade whilst in liquidation, they could be fined, the directors disqualified and even face personal liability for corporate debts.
Negotiating with company creditors
If a company has been successful in the past and has always had a good track record with finances and creditors, it may be possible to informally negotiate repayments and strategies whilst the directors get the company back on track.
These negotiations must be accompanied by a formal plan, including a cash flow forecast, details of requested credit terms, and notes about how the financially difficult situation came about.
Also ensure that you discuss how you intend to trade out of this and highlight a time frame by which you will be able to pay your unpaid invoices.
Work with an insolvency practitioner
Insolvency practitioners don’t just help with the administration and liquidation of businesses, but also help businesses rescue themselves from entering insolvency in the first place.
If your business is approaching financial distress, always seek advice from a licenced insolvency practitioner such as McAlister & Co. This will help you to get a clear vision of what is likely to happen if you decide to trade out of insolvency, as well as whether this is even possible.
An insolvency practitioner will talk you through the whole process, including the risks and obligations while ensuring that you stay on the right side of the law.
They may also advise that you carry out a CVA or revert to alternative financing in order to pay your business’s debts, and they could also advise you to negotiate a Time to Pay agreement if the creditor is HMRC. If the financial situation is more serious, they may recommend that you go into administration or, in some cases, voluntary liquidation.
Trading after administration
Administration may be an option for larger companies. If your insolvency practitioner agrees that there is a viable future for your business, then they will often decide to keep the business operating during this process; this is called ‘trading administration’. In this case, you need to be wary of wrongful trading, which can have serious consequences for both the director and the company itself – always make sure you operate legally by consulting the full rules of wrongful trading which are outlined in Section 214 of the Insolvency Act 1986.
Preventing insolvency
Although it would be great to say that this is always possible, in some cases insolvency can’t be avoided. Ultimately, whether or not your business goes into insolvency depends on individual financial circumstances; that’s why we’d highly recommend speaking to a licenced insolvency practitioner before you take action.
Here at McAlister & Co, we offer a free, no-obligation consultation to discuss your worries and concerns – it’s a great way to get the ball rolling and get ahead of any future threats to your business. Talk to a member of our experienced team or book your free consultation today – we’re always happy to help.
