Generally speaking, and in the first instance, only a drastic reduction in overheads or a substantial injection of capital can return a business to profitability assuming that this is achievable, otherwise some formal treatment will be required. If a return to profitability is possible, the directors of a company should immediately stop trading and appoint an administrator to reconstruct the company’s operation. It’s not that hard! In any event trading an insolvent company on only serves to expose the directors to liability.
Whilst the law does provide some solutions for the distressed business some of these solutions are more palatable than others and the palatability depends, to a large degree upon how early/quickly the problem is identified and addressed.
Another option is coming to an informal arrangement with creditors, however these informal arrangements can become tricky and are more difficult to put in place the longer the business takes commence negotiations with the creditors and the more openly and honestly the creditors have been treated. The better the relationship existing between business and creditors the better the chances of coming to an arrangement with them, but it has to be handled carefully.
The real problem with these informal arrangements is achieving agreements with all of the creditors that they will hold off pending some arrangement to pay, say, by instalments.
Otherwise a formal appointment of an administrator or liquidator might become necessary.
Both informal and formal arrangements are designed to bring about a return to solvency.
In the case of the appointment of an Administrator, by formally imposing a statutory freeze on creditors’ claims including litigation, the company is able to trade while an agreement is being negotiated by the Administrator with creditors; and then, at a meeting of the creditors the proposal for the company’s restructure is finally approved by a vote of the creditors present.
It is important to note that only 50% of the creditors must vote in favour of the proposal and it important to note that family member who may have loaned money are also entitled to vote.
The appointment of a Liquidator “may” also be acceptable particularly if the directors and or shareholders had previously taken a security over the company’s assets to protect their investment in it thereby possibly enabling them to start over free of or at least ahead of creditors’ claims.
The cost of defending any litigation fighting off creditors is often undesirable for the business as litigation can be time consuming, expensive and because of the nature of the process can have unpredictable outcomes and quite often the litigation alone can cause the client’s financial demise.
A better option might well be to appoint an Administrator to the company or in the case of an individual client the appointment of a Trustee under the Bankruptcy Act to bring about a statutory stay/ freeze on all proceedings leaving the dispute (as it generally is) to be dealt with administratively by the Administrator or Trustee as the case may be.
The business can therefore and without the threat of the devastating cost of ongoing court action get together with the creditors through the Administrator or Trustee (as the case may be) and work out a rehabilitation plan. The benefits to both the creditors and debtor alike more often than not outweigh the disadvantages.
Litigating may not be the best option for either party. The benefits to both the creditors and the debtor can outweigh the disadvantages.
- Less is wasted on legal costs on both sides;
- Each creditor will be informed (in the appointment process) of the exact state of the debtor’s finances; as opposed to litigating, not knowing whether the creditor can pay in the event of a successful outcome;
- Each individual creditor will have the comfort of knowing that no other creditor is proceeding to bankrupt or wind up the debtor thus depriving them of any opportunity of being paid;
- There is a higher probability of being paid (at least that which the company is capable of paying), if the debtor is not frittering away the little money he has left on legal fees and the costs incurred by an administrator; and
- The creditors, if they are suppliers, will have continuing business with the customer, (payment for which is generally underwritten by the Administrator or Trustee as the case may be).