Can a Company Reach an Agreement with Its Creditors to Enable It to Continue to Trade?

When a business experiences financial difficulty, one of the most common questions directors ask is whether a company can reach an agreement with its creditors and continue trading.

In many cases, the answer is yes.

There are formal insolvency procedures in the UK specifically designed to help viable businesses restructure their debts, manage creditor pressure and continue trading. The key is taking professional advice at the earliest opportunity.

At BRI Business Recovery and Insolvency, we regularly advise directors on their duties (to shareholders and creditors) and the options available to protect both their company and personal position. Every situation is different, which is why tailored, confidential advice is essential before making any decisions. If you would like some advice for your business, please contact our team today.

Understanding Directors’ Duties in Financial Difficulty

When a company becomes insolvent, or is at risk of insolvency, directors must prioritise the interests of creditors over shareholders and over their own interests. Continuing to trade without a clear and defensible strategy can expose directors to personal liability, including the risk of wrongful trading claims and in the most extreme cases fraudulent trading.

Seeking early insolvency advice is not an admission of failure. It is a responsible step that demonstrates you are acting properly and in the best interests of creditors.

The sooner advice is sought; the more options are typically available so make sure you contact our team today.

Options for Reaching an Agreement with Creditors

There are several formal insolvency procedures designed specifically to help viable businesses continue trading while addressing historic debt.

The most common are:

1. Informal Agreements with Creditors
2. Company Voluntary Arrangements
3. Moratoriums
4. Court Approved Restructuring Plan
5. Administration

Each option serves a different purpose and is suitable in different circumstances. Taking professional advice ensures the correct procedure is chosen and implemented properly.

Informal Agreements with Creditors

In some circumstances, informal arrangements may be possible. These can include negotiated payment plans with suppliers or a Time to Pay arrangement with HMRC.

While informal agreements can provide short term breathing space, they do not offer the legal protection of a formal insolvency procedure. Creditors are not bound and action can resume at any time even if payments are not missed.

Directors should always seek professional advice before relying solely on informal negotiations.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement, commonly known as a CVA, is a formal agreement between a company and its unsecured creditors.

A CVA allows a business to:

• Continue trading under the control of its directors
• Make affordable monthly contributions towards historic debts
• Freeze interest and charges on unsecured liabilities
• Potentially write off a proportion of debt at the end of the arrangement

Once approved by 75 percent by value of voting creditors, the CVA becomes legally binding on all unsecured creditors, including those who voted against it.

A CVA is often suitable where the underlying business is profitable but experiencing cash flow problems, HMRC arrears or significant creditor pressure. It provides structure, certainty and protection, while allowing the company to trade and rebuild.

Before proposing a CVA, it is essential to take advice from a licensed insolvency practitioner like BRI to assess viability and ensure the proposal is realistic and sustainable.

Moratoriums

A Moratorium is a formal legal protection that gives a company temporary breathing space from creditor action while it explores options for rescue, restructuring or refinancing.

A Moratorium allows a business to:


• Continue trading under the control of its directors

• Obtain protection from most legal actions by creditors

• Pause enforcement of debts, including winding-up petitions and certain security enforcement

• Work with professional advisers to restructure or pursue a formal rescue procedure such as a CVA or restructuring plan

During the Moratorium period, which initially lasts 20 business days but can be extended with creditor or court approval, an independent licensed insolvency practitioner, such as those at BRI, acts as the Monitor. The Monitor oversees the process and confirms that the company is likely to be rescued as a going concern.

A Moratorium is often suitable where a business is fundamentally viable but requires short-term protection from creditor pressure in order to stabilise operations and implement a recovery strategy.

Before entering a Moratorium, it is important to seek advice from a licensed insolvency practitioner such as those at BRI to determine whether the company meets the eligibility criteria and whether the protection will provide sufficient time to achieve a successful rescue.

Court Approved Restructuring Plan

A Court Approved Restructuring Plan is a formal court approved process that allows a company to restructure its debts and obligations with the approval of creditors and the court.

A Restructuring Plan allows a business to:


• Propose a legally binding compromise or arrangement with creditors and shareholders

• Restructure secured and unsecured debts

• Potentially reduce, defer or convert liabilities into equity

• Bind dissenting classes of creditors through a court-approved “cross-class cram down”

The process requires creditors and, where relevant, shareholders to vote in classes on the proposed plan. If at least 75 percent by value of those voting in a class approve the plan, the court may sanction it. Importantly, the court has the power to approve the plan even if one or more classes vote against it, provided certain fairness tests are met.

A Restructuring Plan is often suitable for larger or more complex businesses with significant debt structures, multiple creditor groups or where a comprehensive financial restructuring is required to secure the future of the company.

Before proposing a Restructuring Plan, it is essential to obtain advice from experienced professional advisers and licensed insolvency practitioners such as those at BRI to assess viability, prepare the proposal and guide the company through the court approval process.

Administration

Administration is another formal insolvency procedure that can enable a company to continue trading while protected from creditor action.

When a company enters administration:

• A licensed insolvency practitioner is appointed as Administrator
• A statutory moratorium prevents most legal action by creditors
• The business may continue trading
• A restructuring, sale, CVA or court approved restructuring plan can be pursued

The primary objective of administration is to rescue the company as a going concern where possible. If rescue is not achievable, the aim is to realise assets for secured or preferential creditors or achieve a better result for creditors than in liquidation.

Administration is often appropriate where there is urgent creditor pressure, a winding up petition has been threatened or issued, or a sale of the business could preserve value and employment.

Early advice is particularly important where administration may be required, as timing can significantly affect the outcome.