If you’re facing the worst-case scenario of your business being unable to pay its bills, you’ll be faced with some stark options.
It’s a position in which plenty of directors often find themselves. After all, only half of start-ups survive past their third year in businesses, so the prospect of closure regularly rears its head.
If your livelihood is on the line and the company can’t pay its debts, your choices are narrow.
Closing your company and starting again is one of those options, but the law must be carefully considered as strict legal boundaries define what you can and can’t do.
This legislation is in place to stop directors dumping one company and simply starting another to escape debts (and the consequences).
Is your company insolvent?
In simple terms, if your company can’t pay its bills, then it is probably insolvent. There are three tests to measure whether this is the case:
- The cash flow test – can your company pay its debts when they are due?
- The balance sheet test – does your company owe more than it owns as a company, or are the assets exceeded by its liabilities?
- The legal action test – if a business to which you owe money obtains a court judgment that goes unanswered, or if your company has outstanding Statutory Demands for payment.
If your company fails any of these tests, your company is likely insolvent, and you must maximize creditors’ interests as a priority.
That doesn’t mean the business must be closed, as there could be options available to you to rescue it.
But if you are deeply in the red, you will need to consider appointing an Insolvency Practitioner (IP) to liquidate your assets – known as a Creditors’ Voluntary Liquidation (CVL).
Restarting your company
When your failing company has legally closed, you can continue to trade in a new business.
There may even be the possibility of starting a new company with assets of the old, bought for the new business at more affordable costs.
These are known as Company Restarts, but the process must be executed carefully to make sure it is lawful – it is not a way to simply dodge unfavourable conditions.
It can be an option to continue trading, though, making sure you carry on earning and putting to a halt a situation that could see you end up with a hefty court fine.
Benefits of a Company Restart
- You could keep your staff or rehire them, meaning you have the skills you need to build another business.
- Save on debt fees and be rid of bad debts.
- Keep your loyal customers by maintaining your brand.
- Stop weighty running costs associated with the old business.
Contact the Future Strategy team today if you want to find out more.