How to Get Your Business Out of Debt: Practical Steps for Directors

If your business is struggling with debt, you have more options than simply trying to pay everything off at once or shutting down. Company Voluntary Arrangements (CVAs), cost-cutting measures and professional insolvency advice can all help you trade your way back to financial health - but directors must act early, before the situation becomes critical.

What options does a business in debt have?

A business facing serious debt problems has several formal and informal routes available, depending on how severe the situation is and whether the business is fundamentally viable.

What is a Company Voluntary Arrangement (CVA)?

A CVA is a formal insolvency procedure that allows a company to repay its debts over time - typically three to five years - while continuing to trade. The company's directors remain in control, which is a key difference from administration.

To approve a CVA, creditors holding at least 75 per cent of the total debt (by value) must vote in favour. Once approved, the CVA is legally binding on all unsecured creditors, including those who voted against it. An insolvency practitioner must supervise the arrangement throughout.

What is pre-pack administration and how does it work?

In a pre-pack administration, the sale of a business's assets to a new company is negotiated before a formal administrator is appointed. The administrator is then appointed and immediately completes the sale, often allowing the business to continue operating under a new entity with a clean balance sheet.

Pre-packs are controversial because creditors are not consulted in advance. The Insolvency Service has tightened rules in recent years: since 2021, pre-pack sales to connected parties (such as the existing directors) require either independent scrutiny or creditor approval under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021.

How can a business cut costs before taking formal action?

Cost reduction should be explored before any formal insolvency process. Many businesses overpay on supplier contracts, energy and property simply because those contracts have never been renegotiated.

Practical steps include: reviewing all supplier agreements and requesting better terms, switching energy providers or negotiating a payment plan with the current one, and speaking to your landlord about a rent reduction or deferral. HMRC also operates a Time to Pay scheme for businesses that owe tax but cannot pay immediately - contact HMRC's Business Payment Support Service on 0300 200 3835.

Reducing discretionary spending and deferring non-essential capital expenditure can also free up cash in the short term.

When should a director seek insolvency advice?

Directors should seek professional advice as soon as they suspect the business cannot pay its debts as they fall due, or that its liabilities exceed its assets. The longer you wait, the fewer options are available and the greater the risk of personal liability.

An insolvency practitioner (IP) is a licensed professional regulated by one of several recognised bodies, including the Institute of Chartered Accountants in England and Wales (ICAEW) and the Insolvency Practitioners Association (IPA). Many offer a free initial consultation. You can find a licensed IP through the Insolvency Service's online register.

What are directors' legal duties when a company is in financial difficulty?

Once a company is insolvent, or at serious risk of becoming insolvent, directors' duties shift from acting in the interests of shareholders to acting in the interests of creditors. Continuing to trade while insolvent, taking on new debt with no prospect of repayment, or paying certain creditors ahead of others (known as preferential payments) can expose directors to personal liability under the Insolvency Act 1986.

If you are unsure of your legal position, speak to an insolvency practitioner or a solicitor before taking any further action.

FAQ

What is the difference between a CVA and administration?

In a CVA, the directors remain in control of the business and manage the repayment plan under the supervision of an insolvency practitioner. In administration, an administrator takes control of the business, with the aim of rescuing it, selling it or achieving a better outcome for creditors than immediate liquidation would.

Can HMRC be included in a CVA?

Yes. HMRC is typically the largest unsecured creditor in many CVAs and can vote on the arrangement like any other creditor. HMRC has become more willing to engage with CVA proposals in recent years, though it will scrutinise them carefully.

Does a CVA affect the directors' personal credit?

A CVA is a company-level arrangement and does not directly affect the personal credit files of directors. However, if directors have given personal guarantees for company debts, those guarantees remain enforceable.

How much does it cost to set up a CVA?

Costs vary depending on the complexity of the business and the insolvency practitioner involved, but you should budget for at least £3,000 to £5,000 in practitioner fees. Some practitioners charge more for larger or more complex businesses. These costs are typically paid from the business's cash flow or from the CVA payments themselves.

What happens if a CVA fails?

If a company fails to keep up with CVA payments, the supervisor can report the breach to creditors, who may then vote to wind up the company. The company would typically then enter liquidation.

Can a sole trader use a CVA?

No. CVAs are available only to limited companies and limited liability partnerships. Sole traders and personal debtors have access to Individual Voluntary Arrangements (IVAs) and debt relief orders instead.