Is attempting a turnaround ethical when I know there’s a risk of trading insolvently?
My ecommerce business has been suffering with growing debts in a progressively worse trading environment. I’ve put plans into place to turn the company around, but I’m concerned that I’m at risk of trading insolvently. I’m torn between the knowledge that I have an obligation to cease trading if this becomes unavoidable and my confidence that we have a good chance of avoiding insolvent liquidation. What should I do to protect myself? Is a company voluntary arrangement an option?
A. James Bradney writes:
First off, take independent advice from a qualified insolvency practitioner. They will be able to provide guidance on whether it’s appropriate for you to continue to trade and, if so, whether safeguards should be put in place to protect, as far as possible, the interests of the creditors. Such safeguards might include ring-fencing customer deposits, and ensuring that, where possible, suppliers are paid on delivery, so that further credit is not extended. Most insolvency practitioners will be pleased to meet with you for an initial no-obligation discussion held on a confidential basis to consider the issues face-to-face.
Of course, nobody wants to see a viable business fail, but experienced professionals who have advised during previous recessions understand how difficult it is for recovery plans to succeed. Unfortunately, it is often the case that such plans present an unduly optimistic scenario of the future, rather than a rational assessment of a company’s trading prospects. That is not to say that turnarounds can’t succeed – some certainly do. But their common characteristics usually include additional capital injections, management change and supportive stakeholders. Sadly, without these three elements, your prospects of survival are greatly diminished.
A company voluntary arrangement (CVA) may be appropriate, but its success will depend on the viability of your business model. CVAs can be attractive, as they usually provide the opportunity for a greater return to creditors without the business suffering the stigma of going into liquidation. Again, to propose a CVA, early engagement with a qualified professional is advised. CVAs require careful planning and the more time available for this, the more chance there is of a successful outcome for you and your business.