Surviving a cash-flow crisis
The problem
You are the owner of a small business which is basically sound and well run but is suffering a cash-flow crisis. Can the new Insolvency Act 2000, which came into force on 1 January 2003, help you trade out of your problems and survive?
The Law
The Insolvency Act 2000 has introduced the concept of a moratorium designed to protect small companies while they are making arrangements for a "company voluntary arrangement" (CVA).
A CVA allows the management of a company, with the requisite support from its creditors, to continue trading through a survival plan which may see its creditors agreeing to take less than 100p in the pound for what is owed to them but more than they would get in a liquidation.
The problem has been that the actions of small creditors can thwart CVAs before they have had a chance to be put together. The new moratorium rules are designed to prevent this and give a CVA a better chance of being put together for the benefit of the company and its creditors.
A small company is one which has a turnover of not more than £2.8m, balance sheet assets of not more than £1.4m, and not more than 50 employees - or any two of these. The moratorium can be granted by a court for periods not normally longer than 28 days, although it can be extended.
During this period, no one can enforce security without the consent of the court, or obtain or enforce a judgment. A landlord may not forfeit a lease for non-payment of rent nor call on a rent deposit. No creditor may send in the bailiffs to levy distress.
The act also prevents a landlord from forfeiting a lease by peaceable re-entry, and from levying distress for unpaid rent on an individual who has obtained a moratorium while exploring options for an individual's voluntary arrangement.
Expert advice Whether or not the act can help depends on the following issues:
* First, you need to persuade an insolvency practitioner (IP) that your business is sound and can survive if given the breathing space that a moratorium allows. If your business is likely to go under in any case, the IP is unlikely to recommend a moratorium to the court.
* You need a supportive bank to tide you through. Although the act will prevent a bank from foreclosing or calling in its loan during the moratorium, nothing requires the bank to carry on lending you money.
* However, during the moratorium, you can use your resources to pay the people who are uniquely important to your business and whose continued goodwill is essential - for example, your star chef or your suppliers - rather than paying the rent or rates.
* The directors of the company may escape liability for trading while insolvent during the moratorium.
Check list
* Work hard to persuade your IP that your business can trade out of the current crisis if given breathing space.
* Get your key suppliers and your bank on side.
* Consider where you should use your resources; pay key suppliers and those uniquely important to your business.
Beware!
* It is fraudulent to try to obtain credit in excess of £250, even while in a moratorium, if you do not disclose your true situation.
* A moratorium can help give a basically sound business breathing space, but only when your banks and suppliers are supportive. The moratorium's real benefit is to protect you from the opportunistic small creditor who could otherwise wreck your survival through a CVA.
* Even if you persuade your IP that a moratorium is justified, your creditors may not agree and may subsequently refuse to support your CVA.
Contacts
Antonia Brandes
Commercial property partner
Fladgate Fielder
Tel: 020 7462 2208
abrandes@fladgate.com
