A business turnaround is usually precipitated by a cash crisis so funding a turnaround usually involves two steps: At both points in a turnaround, lenders’ confidence in both the business’s management and its ability to meet repayments of borrowings out of future forecasts of cashflows are likely to be low, given the business’s current situation or recent history. Funding for turnarounds therefore tends to rely on: The focus of this chapter is therefore on surviving an immediate cash crisis. The type of funding you will need to raise to finance the business’s future development will depend very much on the nature of the business and your plans for it, and you should therefore refer to the whole of the prior section for guidance as to the best sources of funding.

Wealth Warning

You must not simply use the techniques outlined in this section to obtain more cash, particularly by increasing borrowings or taking further credit simply in order to stave off an inevitable collapse.

You should seek to raise money to support a business in difficulties if you have a real plan for turning it around, which will involve making major changes in how it is operating.

If you simply put more money into a business without making such changes, or insufficient money to see the changes through, all you will be doing is simply sending good money after bad as the business will burn through the new cash introduced. But in doing so you may have actually worsened your position in that you may have:

• converted your own assets, such as money held in a pension scheme, into cash to invest into the business which is then lost;
• had to give personal guarantees for new borrowings; and/or
• become personally liable for the business’s debts as a result of wrongful trading, which is essentially where you took credit from suppliers and carried on trading after the point when you knew, or ought to have known, that there was no reasonable prospect of avoiding failure.

The purpose of this chapter is to help you to weather a cash crisis in order to put a turnaround plan, with some reasonable chance of success, into place. If you are in a cash crisis and you have (or it would be reasonable to have) any concerns about whether there is a reasonable prospect of the business surviving, you must take professional advice to protect your personal position. If you are faced by a turnaround situation you can find more guidance on all aspects of achieving a successful turnaround in Turning a Business Around published by How To Books.

The key questions in a cash crisis are:

• Is the company insolvent? Because if it is, whilst you do not necessarily have to cease trading, there are potential implications and risks of personal liability for the directors (which includes defacto and shadow directors) that can arise out of your legal duties on which you need to obtain advice.
• Does the company have sufficient cash for the immediate/ foreseeable future? If not, you have just answered the first question.
• Will the lenders continue to support you? This may well determine the answer to the second question.

Is The Company Insolvent?

In principle, insolvency simply means that the company is unable to pay its debts as they fall due. Where a winding up is sought on these grounds, the Insolvency Act (1986) sets out four tests, failure of any of which is taken to prove insolvency:

• failure to deal with a statutory demand;
• failure to pay a judgement debt;
• the court is satisfied that the company is failing to pay its debts where due (the cashflow test);
• the court is satisfied that the company’s liabilities (including contingent and prospective ones) are greater than its assets (the balance sheet test).

Insolvency is important because if the company fails, a liquidator can potentially:

• act to set aside some transactions made when the company was insolvent; and
• hold you personally liable for the company’s losses.

Additionally, your responsibility for the insolvency will be taken into account when considering company director disqualification proceedings.

If you are not trading through a company, but are acting as a sole trader, however, you have unlimited liability for all your own debts (business and personal). If you are trading in a partnership, all the partners are liable together and individually for the partnership’s business liabilities (jointly and severally).

The moral is, when in doubt, if you are concerned about solvency, you should seek professional advice concerning your balance sheet position and your short- and medium-term cashflows. This advice may then enable you to legitimately continue to trade your way through while meeting your legal responsibilities.