Insolvency: What You Can Expect
Insolvency is a difficult experience for your company. To better prepare you for the effects, we have put together a quick insolvency guide for leaders and directors of troubled firms.
What Happens To Your Company
If you default on your loan contract, your banker, because of its floating
charge and lien, will take over your company. Next, the bank appoints
an insolvency practitioner to run your firm in the best interest of the
bank.
This practitioner then decides with the bank either to liquidate the company or to keep it as a going concern. Of course, their choice depends on what is best for the bank and not what is best for the equity holders or the trade creditors.
Usually, if the going concern value is greater than the liquidation value, the choice will be to keep the company alive especially if it can pay the loan off in 6 to 12 months with cash flow and asset sales. After this rescue period is over, the bank may issue a new loan or may ask the company to “rebank” at another bank.
What Happens To You
If you are part of the management team or a director, the bank will ask you
to resign from the firm. Frankly, insolvency for you means that you are out
of a job, and it will have damaged your reputation.
What You Can Do
The best course of action is to avoid default. You should have in place a
daily scorecard showing how your company is performing against your loan contract
agreements. If a measure is getting into the danger zone, you need to take
immediate corrective action. You should put this scorecard tracking in place
today.
The other action that you should take today is to create a turnaround plan that will improve the long-term health of your business. The best information available on rebuilding businesses is The Insider Secrets to Saving Your Business. This is an insolvency rescue bible and anyone wanting to fix a firm before it defaults should read this publication.
I hope this helps your understanding of the results of loan default.
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