An insolvent company has several options open to it. From liquidation, a Company Voluntary Arrangement (CVA), entering into Administration to a Scheme of Arrangement. Each option is unique and will lead to a different outcome for the company.
So, if your company is facing financial difficulties, it is important to get insolvency advice as quickly as possible to find the best path forward for your company under the circumstances.
To help you understand what options are open to you, Clarke Bell has put together this handy guide outlining the 4 main options available to insolvent companies.
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What is business insolvency?
A company is deemed insolvent if it can no longer afford to pay its day to day costs or debts when they are owed, or has liabilities that are greater than its assets.
If your company is insolvent, or has started showing signs of financial distress, it is important to act as quickly as possible to prevent the situation from getting worse. The sooner you act, the more options will remain open to you.
Some insolvency options will aim to turn the business around and restore its profitability, whereas others will close the company altogether and, where possible, pay back creditors what they are owed.
First, let’s look at options for businesses wanting to turn around and become sustainable once again.
Option 1: Company Voluntary Arrangement (CVA)
With a Company Voluntary Arrangement, a licensed Insolvency Practitioner will be appointed to carry out and oversee the process.
The Insolvency Practitioner will only carry out a CVA if they believe the company has real chances of turning around and restoring profitability. For a CVA to progress, 75% of creditors must approve.
A CVA is formal process that allows an insolvent company to:
- Draw up a formal arrangement with creditors over the repayment of its debts
- Pay back a portion of their debts
- Create a timetable under which repayments will be made which can last anywhere between 2 – 5 years
This arrangement is made between the directors and creditors as a way to help rescue the business whilst paying creditors what they are owed.
To be eligible for a Company Voluntary Arrangement a company must:
- Prove it is insolvent. A company can show this by proving that they can no longer pay their debts or that their liabilities outweigh their assets
- Have appointed the services of an Insolvency Practitioner who is confident that the business has real chances of restoring profitability
- Can show projected cash flow forecasts that show they will have enough funds to cover the repayment terms outlined
Option 2: Scheme of Arrangement
Another option for an insolvent business is a Scheme of Arrangement.
A Scheme of Arrangement is reached between the directors and creditors and needs the approval of at least 75% of creditors to progress.
A Scheme of Arrangement can include reorganising the company structure whether that is by merger or demerger, or by a debt for equity swap or other debt-reduction strategies.
This is an option that allows the company to continue trading.
Once a Scheme of Arrangement has been identified as a viable option for the company, negotiations will then take place to plan the restructuring of its debt.
Option 3: Administration
The next option for insolvent businesses is one that can lead to either business rescue or the closing of the business.
When a company goes into administration the end goal is to take control of its assets and repay creditors the money they are owed. The company is put under the management of a licensed Insolvency Practitioner who becomes the administrator.
There can be several outcomes of administration, including:
- Liquidation: if there is no chance the business can be rescued then the company can be closed and will cease to trade. This will usually be through a Creditors’ Voluntary Liquidation (CVL) under which creditors are, where possible, paid back what they are owed.
- Going-concern: here, the company can be sold as ‘going-concern’ which means they will continue to operate and trade
- Company Voluntary Arrangement: the final outcome is that the company will enter into a CVA. Again, they will be able to continue trading and will work towards restoring profitability
Whilst under administration, a moratorium is placed on the company and means no legal action can be taken against it.
Option 4: Liquidation
The fourth and final option for insolvent businesses is liquidation.
Unlike options for business rescue, liquidation closes the company and means it will cease to trade and operate.
Again, as a formal insolvency process a licensed Insolvency Practitioner must be appointed to oversee and carry out the liquidation process.
There are two forms of liquidation: voluntary liquidation vs compulsory liquidation.
As the name suggests, this is a completely voluntary process initiated by a company director.
There are two types of voluntary liquidation:
- Creditors’ Voluntary Liquidation (CVL): this is an option available to insolvent companies that will liquidate their assets and close the company, ensuring creditors are, where possible, paid back what they are owed. This is a good option for companies that are no longer sustainable and therefore it is better for them to wind-up and dissolve.
- Members’ Voluntary Liquidation (MVL): unlike with CVL, a Members’ Voluntary Liquidation is a route open only to solvent This is a good way for a director to close a company in a tax-efficient manner.
There is also compulsory liquidation which is forced on a company. This is initiated by creditors who are owed money. Creditors will issue a winding-up petition to the court which, if successful, will forcibly wind up the company.
As it sounds, this is the most serious form of liquidation and should be avoided where possible.
So, if you are experiencing financial difficulties it is always best to seek insolvency advice before matters get worse. That’s where Clarke Bell are here to help.
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Our friendly team have over 28 years’ worth of experience dealing with all matters of insolvency. So, whatever your situation, we will work closely with you to get you on the best track for you.