If your business is struggling financially there are several options open to you. From liquidation, which closes the company altogether, to options for business rescue.
The goal of business rescue is to return a company to profitability. This is typically carried out and overseen by a licensed Insolvency Practitioner who genuinely believes the business can once again become sustainable and solvent.
To help explain what your options are when it comes to business rescue in 2021, Clarke Bell have put together this handy guide.
What is business rescue?
Business rescue refers to the process of rehabilitating a company that is struggling financially. Typically under the guidance of an Insolvency Practitioner.
The purpose of business rescue is to turn the company around and restore it to profitability.
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There are several business rescue options in which an Insolvency Practitioner will need to be involved, including:
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement is a legal agreement made between a company and its outstanding creditors to repay a fixed amount that is lower than the outstanding debt. This must be agreed by 75% of creditors and 50% of shareholders and will have been drawn up by the Insolvency Practitioner who is appointed to oversee the CVA.
These payments are usually made monthly and the remaining debt is written off at the end of the agreed term which is usually between 3 – 5 years. Throughout this process, the company is able to continue trading and the director remains in control.
A CVA is a good option for businesses that show real signs of recovery and will mean they can avoid going into liquidation under which the company will be closed.
Any company can enter into a CVA if they meet the following conditions:
- They are insolvent – meaning they can’t afford to pay their debts, cover their daily costs and have liabilities that outweigh their assets.
- The director and Insolvency Practitioner believe the business has a chance of recovery and can become sustainable once again to restore profitability
- The company can show projected cash flow forecasts that show they are likely to have enough funds to cover the repayment terms outlined
By entering into a CVA a company can avoid:
- Creditors’ Voluntary Liquidation (CVL):a CVA allows directors to avoid having to put their company into liquidation through Creditors’ Voluntary Liquidation. This is a voluntary process initiated by the director of an insolvent company when business rescue no longer seems like a viable option. The end result is the company being liquidated and closed. For more information on the process of voluntary liquidation, check out our guide for everything you need to know.
- Compulsory liquidation:by opting for a CVA a director can also avoid being forced to liquidate and dissolve their company by the courts through compulsory liquidation. Here, creditors who are owed money will issue a winding-up petition to the court and, if successful, the court has the power to appoint an Insolvency Practitioner to officially liquidate the company. Just as it sounds, this is the most serious form of liquidation over which a company director has no say.
Another option open to insolvent businesses looking for turnaround is administration which aims to take control of a company’s assets and repay creditors money they are owed.
A company is given protection against any legal action whilst under administration, meaning creditors can’t threaten to wind the company up during this time.
As it is a formal insolvency procedure, an Insolvency Practitioner must be appointed and will act as the administrator.
During administration there are a number of different things that can happen:
- the company can enter into a Company Voluntary Arrangement (CVA) which allows them to continue trading whilst aiming to turn the business around
- the company can be sold as a ‘going concern’ to another company – meaning they can carry on and keeping its clients, workforce or orders
- the assets can be sold as part of a Creditors’ Voluntary Liquidation(CVL), with the creditors being paid from any money raised, and the company closed
- close the company if there’s nothing to sell.
What happens if business rescue fails?
If the attempts to turn around the business fail, the next logical step is liquidation.
Another option could be a pre-pack administration. This involves putting an insolvent company into administration and selling the company and assets. The sale has to be arranged before the company is put into administration to ensure there is a suitable buyer.
The pre-pack administration process requires a licensed Insolvency Practitioner to be appointed who will conduct a review of the insolvent company’s activities to determine whether the company can be sold.
The Insolvency Practitioner will also assess whether jobs and business relationships can be preserved. Once a thorough assessment has been carried out and a buyer has been confirmed, the Insolvency Practitioner will negotiate and agree the terms of the sale. In some cases, the purchaser may be members of the existing management team.
One of the main advantages of pre-pack administration is that it gives directors the chance of saving the business even if it can’t save the company as a whole. By selling a business in this way the owner can ensure ongoing trade, jobs and relationships with customers can all be maintained.
Business rescue vs Liquidation: Let Clarke Bell help you
Are you looking for options for business rescue – either through a Company Voluntary Arrangement or administration?
Or, have you decided it is the right time to close your insolvent company through Creditors’ Voluntary Liquidation?
Either way, Clarke Bell are here to help you.
We offer expert insolvency advice geared towards you and your circumstances, to ensure we can find the best possible solution and outcome for your business. To see what we can do for you today get in touch to find out more.