Business – 5.1 Business finance – The need for business finance | e-Consult

1. Immediate assessment: Review cash flow forecasts, identify the shortfall, and explore short‑term financing (e.g., overdraft, bridge loan) or asset sales.
2. Engage creditors: Communicate with trade creditors to negotiate extended payment terms or a payment plan, demonstrating a realistic recovery strategy.
3. Seek professional advice: Consult an insolvency practitioner (IP) to evaluate whether the company is insolvent and to advise on the most appropriate route.
4. Possible legal procedures:

   • Administration: If there is a reasonable prospect of rescuing the business, the directors may appoint an administrator to protect the company from creditor actions while a rescue plan is developed.
   • Creditors’ Voluntary Liquidation (CVL): If rescue is not viable, the directors may convene a meeting of creditors to agree on winding up the company.
   • Bankruptcy (for sole traders): If the business is a sole proprietorship, the owner may be declared bankrupt, leading to asset realisation.

5. Consequences:

   • For the business: Administration may allow continuation, restructuring, or sale; liquidation results in the firm’s dissolution.
   • For creditors: Secured creditors are likely to be paid first; unsecured creditors may receive a reduced dividend or nothing, depending on the outcome.
   • For employees: In administration, staff may be retained; in liquidation, employment contracts are terminated, with limited statutory redundancy rights.
   • For directors: They must avoid wrongful trading; failure to act when insolvent can lead to personal liability and disqualification.

By following these steps, the directors demonstrate due diligence, potentially minimise losses, and comply with legal obligations.