A cash flow crisis is the point at which the company cannot pay a bill that is due. It is not a tight month. From that point, every payment the board makes can be examined later if the company ends in liquidation, and the liquidator will ask why each one was made.
The seven steps below are in the order an insolvency practitioner would take them. If you are still working out whether the problem is timing or something deeper, start with diagnosing a cash flow problem.
(1) Build a forecast you would be willing to show a liquidator
Before any decision, the board needs a week-by-week cash forecast for the next three months, an aged list of every creditor including HMRC, and a list of the debts owed to the company. Use what will actually arrive, not what is invoiced.
Mark which creditors can take action soonest. A creditor owed more than £750 can serve a statutory demand, and if it is not paid or settled within 21 days, the company is treated as unable to pay its debts. See statutory demands against a company.
(2) Decide who gets paid, and minute why
Once the company is insolvent or bordering on insolvency, the directors must weigh the interests of the creditors as a whole, not just the shareholders (BTI 2014 LLC v Sequana SA [2022] UKSC 25). Choosing whom to pay is where that duty bites.
A payment that puts one creditor ahead of the rest can be reversed as a preference if the company was unable to pay its debts at the time, or became unable because of the payment, and the payment was made within six months of insolvency, or two years if the person preferred is connected to the company, such as a director or a family member. The company must also have been influenced by a desire to put that creditor ahead. That desire is presumed only where the person preferred is connected. A director who has guaranteed a debt is a person preferred when the company repays it, so the two-year period and the presumption apply to that repayment even if the lender is unconnected. Paying the suppliers you need in order to keep trading is different from clearing a director’s loan or a personally guaranteed overdraft first. Record the reason for each decision in the board minutes.
(3) Talk to your creditors before they act
A creditor who hears a credible plan early has a reason to wait. One who hears nothing has a reason to issue a demand. Put any proposal in writing, and only offer what the forecast says the company can pay. A missed promise costs more trust than a smaller one kept.
For tax debts, HMRC can agree a payment plan, usually called Time to Pay. It will check that the plan is affordable. If no plan is agreed, HMRC will ask for the full amount. A Time to Pay arrangement is an agreement with HMRC, not an insolvency procedure, and it does not bind any other creditor.
(4) Bring cash in faster
- Invoice on delivery, not at the end of the week or month.
- Ask for deposits or stage payments on new work.
- Chase from the first day a payment is late. The law lets you charge interest on late business payments at 8% above the Bank of England base rate, and saying so often speeds payment up.
- Use invoice finance with care. It advances cash against unpaid invoices, for a fee. It helps a company whose problem is timing. For a company that is insolvent, it only brings forward cash the creditors as a whole would otherwise share.
(5) Sell what the business does not need, at a proper price
Surplus vehicles, equipment and slow stock can raise cash quickly. You can only do this once, so it buys time rather than fixing the cause. Check first that the sale does not damage the core business.
Sell at market value and keep the evidence. A sale for less than an asset is worth, in the two years before insolvency, can be challenged by a liquidator as a transaction at an undervalue, and a sale to a director or someone connected to them will be looked at first.
(6) Cut costs in the right order
Discretionary spend goes first: travel, subscriptions, overtime. Then premises and contracts, where landlords and suppliers facing an empty unit or a lost customer may agree a temporary reduction.
Payroll is usually the largest cost and the last to cut. Shorter hours or a pay freeze may avoid redundancies. If redundancies are needed, they carry their own notice and payment obligations, which a company in crisis must be able to meet.
(7) Take advice on the formal routes if the forecast does not close
If the forecast still shows a gap the steps above cannot fill, that is a strong sign the company is, or is about to become, insolvent. Whether it is insolvent is a legal test under section 123 of the Insolvency Act 1986, not a forecast rule. A director who keeps trading after there is no reasonable prospect of avoiding insolvent liquidation can be ordered to contribute personally under section 214 of the Insolvency Act 1986. At that point the question is which formal route, and each needs a licensed insolvency practitioner:
- A company voluntary arrangement. The company repays an agreed part of its debts over an agreed period. It needs the approval of 75% or more by value of the creditors who vote. It is not approved if more than half by value of the unconnected creditors, meaning all those whose claims are admitted for voting, whether or not they voted, vote against it. Once approved, it binds every creditor who was entitled to vote. If the company misses the agreed payments, the arrangement can be treated as failed under its own terms. The supervisor can then petition to wind the company up, and so can a creditor once the arrangement has ended.
- A moratorium. A standalone moratorium gives an initial 20 business days of protection from most creditor action while a rescue is put together. A qualified insolvency practitioner acts as monitor, and must state that rescuing the company as a going concern is likely.
- Administration. An administrator takes control and protects the company from creditor action while trying to rescue the business or get creditors a better result than a liquidation would.
- Creditors’ voluntary liquidation. Where no rescue will work, the directors close the company in an orderly way, before a creditor forces a compulsory liquidation.
Talk to a licensed insolvency practitioner
AABRS® takes these appointments, and the first consultation is free. Bring the forecast and creditor list from step 1. Call us on 0208 444 3400 or send us your details.