Cash flow problems followed by debt issues and staff cutbacks are a significant worry for all businesses. When a business is facing difficulties paying its debt, a creditor will often engage a debt collection company to recover the receivables. This blog series will help you gain insight into the process of debt restructuring and its informal and formal options collection agencies perform, using the strategies of workout, voluntary administration, liquidation and receiverships.
The term “workout” refers to an informal deal between the debtor and the creditor on mutually beneficial terms. This kind of negotiation between the two parties is usually made early in the debt collection process and based on the assumption of a potentially viable debtor whose business has a good chance to recover fully. A workout could either be a so-called composition, a contract in which the creditor agrees to take partial payment in full satisfaction of his claims, or an extension for paying the instalments. A workout agreement is a sustainable solution for the debtor as it will spare the business from the stigma attached to bankruptcy with its reduced company asset followed by the loss of customers and investors. If all parties agree to the workout terms, this option is furthermore a money-saving alternative to any formal appointment as this will involve further costs.
The advantages of a workout are as follows:
- Reduction in costs
- Directors retain control of the business
- The company’s reputation is preserved
- Directors can avoid insolvent trading and other voidable transaction recoveries;
- It is not a creditor-driven process
The disadvantages of a workout are as follows:
- Directors may be found during the process to have breached their director’s duties;
- Any standstill and workout agreement requires the agreement of all creditors, i.e. without such agreement, the non-consenting creditors are free to pursue their normal legal remedies, and this can jeopardise the objectives of the workout. This is contrasted with a VA, wherein the decision of the creditors present, and voting at the Section 439A meeting binds the entire body of creditors. Hence, formal administration provides for more certainty than an informal workout;
- Financiers can potentially fall foul of the Act provisions with respect to insolvent trading by ‘shadow’ directors;
- Directors may be held liable for insolvent trading.
Our next blog in this series will discuss the informal option of Voluntary Administration and its advantages as well as disadvantages.
If you would like to learn more about the debt recovery services we offer, contact us now. We have over 30 years of experience providing professional and discreet debt collection solutions for clients of all sizes and across all industries. With debt collection agencies in Sydney, Melbourne and Brisbane we have you covered.