Ireland’s Guide To Money And Living

How to handle business debt

Handling mounting debt is a tricky issue if you’re running a small business. Aengus Burns, a Director in Grant Thornton Recovery and Reorganisation, outlines the options when a business has stalled.
Many people conduct large-scale business without the ‘limited liability’ protection from business debts that forming a company can give them, opting instead for ‘sole trader’ status. So long as creditors are paid on time, this isn’t a problem. In fact, it can be a tax-efficient way to work.
However, when keeping up with business debts is a problem, a sole trader isn’t able to limit the liabilities to the assets controlled by the business – which is the case when trading as a limited company. Your personal assets and future income can be affected until you reach a settlement with creditors.
If negotiating directly with creditors on a one-to-one basis fails, you’ll need a comprehensive solution. There are a number of formal and informal options, though, for managing large-scale debts with several creditors.

Being declared bankrupt is a common protection from creditor pressure in many countries. It generally involves a person passing control of all their assets to a trustee, who then pays creditors as effectively as possible by selling the assets. After some time, a bankrupt is discharged and restrictions on their doing business again lapse, letting them start afresh.
These restrictions on doing business are more than a small irritation, however, particularly when a sizable chunk of someone’s personal assets have also gone into paying creditors. In Ireland, bankruptcy has long been overly restrictive and a long-drawn out process for both debtors and their creditors. This leads to many people seeing bankruptcy as a harsh, even vindictive, measure taken by a creditor against a businessperson, even though it’s rarely in either person’s commercial interests.
However, although it’s rarely used, the bankruptcy route can be followed effectively with good professional assistance.
Another option for someone with large personal business debts that they can’t
 pay is to make an Application to Court seeking protection from creditors. If this is accepted, a proposal is then made to creditors to pay them a percentage of what they are owed, based on realising the value of a person’s assets.
A meeting of creditors is then called to discuss and vote on the proposal. If a three-fifths majority of the creditors voting at the meeting – who also need to represent three-fifths of the person’s debts – agree, the proposals are confirmed by the court. This solution avoids the disabilities and disqualifications of becoming a bankrupt, but still gives a degree of protection from creditors and much-needed breathing-room to put a settlement together.

A very common solution to personal business debt problems (and one that avoids the cost and delay of the court system) is a voluntary arrangement with creditors. Effectively, this is where creditors agree with you and all of the other creditors to accept partial payment of their debts and drop their claims. The settlement is contractual, but you need all your creditors to agree to receive less than what they’re owed. If this is possible to do – and don’t underestimate the difficulty of if – it’s typically the best solution for everyone concerned.
As with any commercial solution, a person looking to put together voluntary arrangements with creditors needs to be pro-active and address problems promptly and positively. The sooner a deal is reached, after all, the sooner the problems go away.