Navigating the business world can be complex. In today's economy, financial problems are common.
According to the UK Government, there were 23,872 company insolvencies in England and Wales in 2024, which is 5% lower than 2023, but extremely high relative to historic levels. This alone underscores the importance of understanding critical fundamentals around business insolvency and company restructuring.
In this blog article, we cover the following:
- What is business insolvency?
- What does company restructuring mean?
- When is company restructuring necessary?
- The restructuring process
- Protecting from business insolvency
What is business insolvency?
Business insolvency happens when a company cannot pay its bills. This includes debts owed to creditors and suppliers. Learn more about the warning signs of business insolvency.
Business insolvency can trigger formal legal processes outlined in the Insolvency Act 1986. Not every business in financial trouble needs formal help. However, Insolvency Practitioners (IPs) are important in handling certain cases.
They handle various insolvency procedures, such as company voluntary arrangements (CVAs), administration, liquidation, and receivership, depending on the specific circumstances. IPs act in the best interests of creditors, ensuring fair distribution of available funds.
The Official Receiver, a government official, also plays a key role during business insolvency proceedings, particularly in compulsory liquidation cases.
What does company restructuring mean?
Company restructuring involves implementing strategic changes to a business's operations and financial structure to improve its financial health. The goal with company restructuring is to avoid business insolvency.
Restructuring experts expect more restructuring plans to arise in 2025 compared to 2024. This is due to a few key reasons - mainly persistent supply chain disruptions that may lead to difficult trading conditions.
When is company restructuring necessary?
Companies implement restructuring plans when any or all the following conditions arise:
- Consistent declining profitability, despite attempts to increase revenue
- High levels of debt, difficulty servicing debt obligations (e.g., interest payments), and increasing pressure from creditors
- Persistent cash flow shortages, difficulty meeting short-term financial obligations, and reliance on short-term borrowing
- Increased competition from new entrants, disruptive technologies, or changing consumer preferences
- High operating costs, outdated business models, and inefficient use of resources
- Compliance issues, lawsuits, and increasing regulatory burdens
It appears that early identification and proactive implementation of company restructuring strategies can significantly improve a business's chances of avoiding business insolvency.
The restructuring process
Restructuring a company requires a tailored approach, considering its unique financial situation, short-term outlook, and long-term objectives. Companies can use different methods to help a struggling business improve. This often happens during formal processes like administration.
Administration:
This process aims to save viable parts of the company, allowing it to continue operating. If not possible, administrators prioritise maximising returns for creditors compared to immediate liquidation.
Administration essentially offers time, space, and legal protection for restructuring while the business may continue operations.
Pre-pack administration:
In this specialised approach, asset sales are negotiated before an insolvency practitioner is appointed. The buyer can be external or, frequently, the company's directors operating through a newly formed entity.
The sale becomes final as soon as the practitioner receives the administration appointment.
Company Voluntary Arrangement (CVA):
A CVA is a formal debt restructuring plan agreed upon by the company and its creditors. Supervised by an insolvency practitioner, it outlines a payment plan that benefits both the company and its creditors.
If approved by 75% of creditors (by value), the CVA becomes legally binding. It typically involves a 3-5 year repayment period, potentially including debt write-offs.
Time to Pay (TTP) arrangements:
Specifically for HMRC tax arrears, TTPs allow companies to restructure tax debts into manageable payment plans. These plans usually span 3-6 months, with extensions possible in certain cases.
Negotiators discuss TTPs directly with HMRC and plan carefully to ensure affordability and acceptance.
Refinancing:
Assessing and restructuring existing financing is crucial. High-interest debt can significantly strain cash flow.
You can negotiate lower interest rates or extend repayment terms. Another option is to find new funding sources. These sources include loans, invoice finance, or asset-based lending.
Streamlining and cost cutting:
This involves identifying and addressing non-performing areas or departments, potentially closing them or scaling them down. This streamlines operations, increases efficiency, and reduces operating costs, enhancing the company's overall resilience.
Protecting from business insolvency
Company Watch has helped hundreds of companies understand their financial risk exposure and reduce the damaging impacts of business insolvency. Our powerful risk analysis and data modelling platform provides important and relevant insights, allowing you to manage financial risk effectively.
Our platform also allows you to map medium to long-term risk alongside short-term risk. This means you have a better understanding of where your business, or one you are working with, stands today and in the future. This helps you make smarter decisions built from insights and data.
Key takeaways
- Business insolvency happens when a company cannot pay its bills. This includes debts owed to creditors and suppliers.
- Company restructuring involves implementing strategic changes to a business's operations and financial structure to improve its financial health.
- Restructuring a company requires a tailored approach, considering its unique financial situation, short-term outlook, and long-term objectives.
