The artificial intelligence sector moves fast. New entrants appear almost daily, but the combination of high development costs, uncertain funding and rapid change means that many AI businesses struggle to stay solvent.
Financial difficulty does not have to mean failure. Directors who act early can use a range of rescue and restructuring tools to stabilise their companies, protect assets and safeguard their own positions.
At Francis Wilks & Jones, we advise AI founders and technology directors across England and Wales on how to recover control before insolvency becomes unavoidable.
What causes AI companies to face financial difficulty?
AI businesses are often built on heavy investment and long development cycles. Cash-flow problems can arise when external funding slows, sales pipelines take longer than expected, or projects overrun their budgets. Dependence on R&D tax relief can also create pressure if claims are delayed or rejected by HMRC.
Many AI companies also underestimate operational costs such as cloud computing, data storage and specialist staff. These expenses can escalate quickly, leaving directors with little room to manoeuvre. Recognising the warning signs early is vital. Late payments to suppliers, falling revenue and growing HMRC arrears are all indicators that professional advice may be needed.
What rescue options are available for AI businesses?
Directors of AI companies have several formal and informal routes to protect their businesses when financial problems arise. The most suitable option depends on the company’s structure, level of debt and long-term viability.
A Company Voluntary Arrangement (CVA) allows the business to reach a legally binding agreement with creditors, usually by repaying part of its debts over time while continuing to trade. Small eligible companies can apply for a short moratorium, usually lasting up to 28 days, to prepare their CVA proposal. To qualify, the company must meet the size criteria in Schedule A1 of the Insolvency Act 1986—based on turnover, balance-sheet total and number of employees—and must not already be subject to an insolvency order or administration.
An administration provides short-term protection from creditor enforcement. It creates a moratorium preventing creditors from taking enforcement action without the administrator’s consent and can give the company breathing space to restructure, refinance or sell the business and its intellectual property as a going concern.
Less formal arrangements, such as time-to-pay agreements with HMRC or negotiated settlements with key suppliers, can also prevent escalation if handled quickly and transparently.
How does a Company Voluntary Arrangement (CVA) help?
A CVA is often used by companies that are fundamentally viable but burdened by temporary or historic debt. Once approved by 75 per cent of voting creditors, it binds all unsecured creditors to the repayment terms. A CVA does not automatically bind secured or preferential creditors unless they consent to be included. Their rights over company assets remain intact unless they voluntarily agree to vary their security as part of the arrangement.
For a CVA to be approved, at least 75 per cent of creditors by value must vote in favour of the proposal, and no more than half of the independent creditors by number may vote against it. These dual thresholds ensure that the proposal has genuine majority support.
For AI companies, a CVA can be especially effective where valuable intellectual property or recurring licensing income exists. It allows directors to keep trading, preserve staff and maintain relationships with investors and clients. The key to success is a realistic proposal supported by accurate forecasts and professional guidance from insolvency practitioners and lawyers.
When is administration the right option?
Administration is appropriate where creditor pressure is severe or where the company needs protection from immediate winding-up threats. On entering administration, a moratorium is created, preventing creditors from taking enforcement action without the administrator’s consent.
For AI firms, administration can help preserve complex assets such as algorithms, codebases and datasets. A “pre-pack” sale, where the business or its key assets are sold immediately after appointment, can enable continuity and maximise value for creditors while transferring operations to a new company structure.
Directors should remain mindful of their duties to creditors when a company approaches insolvency. Seeking early advice from insolvency professionals and lawyers (particularly when considering administration) can help demonstrate that directors have actively considered and fulfilled those duties. Prompt action and cooperation with the process are key to mitigating personal liability risks.
How can directors act early to save their business?
Timing is critical. The earlier directors seek advice, the more options remain available. Taking action at the first signs of distress demonstrates good governance and reduces the risk of wrongful trading or disqualification or other misfeasance claims.
Practical early steps include preparing accurate financial information, engaging with major creditors and considering whether parts of the business can be restructured or sold. Directors should also review personal guarantees and ensure they are meeting their duties under the Companies Act 2006 and Insolvency Act 1986.
With professional support, many AI businesses can be stabilised or refinanced before insolvency proceedings begin.
How FWJ can help
Our lawyers combine deep insolvency experience with sector knowledge of AI and technology companies. We work alongside accountants and investors to design tailored rescue strategies, implement CVAs and manage administrations.
If your AI company is under financial pressure, early advice can make all the difference. Contact us to discuss practical steps to protect your business, its directors and its intellectual property.
