By Lance McArthur
Operating a company under current market conditions is essentially a game of survival of the fittest. With business tax rises on the horizon, high inflation and low consumer confidence, business owners in financial distress must understand their options and act early to survive yet another challenging year of trading.
Whether company directors decide to pursue company closure or company rescue, the value of the business and its potential to turn a profit will determine what route is best. There’s a fine line between whether a company is destined for closure or can operate successfully – a licensed insolvency practitioner will weigh both options and provide a roadmap for the most suitable option, providing that it’s feasible and in the best interests of creditors.
Is insolvency looming?
As we approach a new tax year, businesses must take a hard look at their financial health, take stock of their liabilities and plan for the year ahead. If a cash shortfall is in the forecast, business owners must immediately address this to protect creditor interests and reduce the insolvency risk.
An insolvency practitioner will strategically assess the financial health of the business and its potential to operate successfully. An insolvency practitioner will set out to understand the business, the path it has trodden, and what direction the company director wishes to take.
The financial state of UK businesses
Recent company insolvency statistics published by Begbies Traynor Group show that within a quarter of the Autumn Budget announcement, critical financial distress climbed by 50% to 46,853 businesses in critical financial distress. As the UK business population weathers harsh trading conditions, high borrowing costs and a dip in consumer demand, the insolvency risk is high.
The report shows 654,765 in significant financial distress across all sectors in Scotland in Q4 2024, an increase of 22,000 companies compared to the prior quarter (Q3 2024: 632,756). As SMEs across Scotland feel the ripple effects of the Autumn Budget, business owners gear themselves for a taxing quarter ahead.
To stay or to go
We sat down with Chelsea Williams, a corporate insolvency adviser at Scotland Liquidators, to understand how company directors can determine whether to close or rescue a company in financial distress.
“To stay or to go – that’s a question most business owners in financial distress wrestle with daily. If there’s rescue potential and an appetite to continue business operations, a licensed insolvency practitioner will exhaust every available avenue to secure a lifeline for the business.
“If the business is too far gone and overladen with debt, it may be unavoidable to bring the business to a close.”
Company closure – If it is inevitable to close the company, this must be achieved in an orderly fashion. The company closure route will largely be determined by the debt value of the company. A company with no debts may consider company strike off, while a debt-ridden company may pursue a Creditors’ Voluntary Liquidation.
Company rescue – If company rescue is possible, the insolvency practitioner will explore options to preserve the business. This is when intervention from a licensed insolvency practitioner can truly turn around the fortunes of a business. From formal payment plans with creditors, and business finance, to company restructuring, the company rescue routes available are aplenty.
The questions that determine whether a company director should pursue company closure or rescue include:
- Is the company solvent (able to fulfil liabilities) or insolvent (unable to fulfil liabilities)?
- Is there value in the business?
- Is there rescue potential?
- Is there consumer demand and profit potential?
- Is there room for negotiation with creditors?
- Is the company director motivated to continue the business?
While it’s the role of the company director to secure the future of a business, an insolvency practitioner will play an instrumental role in facilitating this. Business owners must remain proactive and vigilant as the UK economy experiences a slump in growth and productivity.
