The past 2-3 years have been difficult and challenging time for thousands of businesses across the UK due to the pandemic and subsequent lockdowns and now the cost of living crisis. If your company has struggled financially and is now insolvent, meaning it can no longer pay its bills or debts, then it’s time to look at your options.

From liquidation, through which a company is liquidated and dissolved, meaning it will cease to trade and operate, to options for business rescue, such as a Company Voluntary Arrangement or administration, which aim to turn a business around. Every director needs to know what routes are open to them.

A company can be liquidated as soon as it becomes insolvent – in other words, as soon as the business’ liabilities exceed its assets and it can no longer pay outstanding debts. In the UK, administration is a legal procedure that offers a way to rehabilitate a struggling company so that it isn’t forced to wind up business prematurely.

To help, in this guide Clarke Bell outlines what options are available to insolvent businesses, to help you find the best next steps for you.

Liquidation vs. Business Rescue

Liquidation and business rescue are two sets of options for struggling companies. Although both categories serve struggling companies, this is where the similarities end. Liquidation solves a company’s financial problems by means of winding down operations and selling off assets, with the proceeds going to wipe away as much debt as possible. Naturally, this means the end of the company in question.

Business rescue, on the other hand, aims to do exactly that – rescue the company as a going concern. While the specifics of a business rescue plan may differ from company to company, the end goal of each is to restore a company to profitability. Given how different the goals and end results are between the two categories, which is best for you will strongly depend on your specific circumstances.

Option 1: Liquidation

Liquidation is a way of formally closing down a company. As a legal insolvency process, a licensed Insolvency Practitioner must be appointed to carry out the process.

Through the liquidation process, a company’s assets are sold, and any realisation is distributed to the company’s creditors. Next, the business is dissolved, meaning it is struck off from the registrar kept at Companies House.

While liquidation involves selling all of a company’s assets before dissolving the business altogether, administration is a structured process that aims to help the company pay back its debts in order to avoid liquidation. Liquidation means the company stops trading altogether, and its remaining assets are converted into cash to pay off existing creditors.

While the business may survive in another form, liquidation is, practically speaking, the end of the company. In the UK, Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation are used to wind up an insolvent company, while Members’ Voluntary Liquidation (MVL) is used to legally shut down a company that no longer serves a purpose.

There are two main types of liquidation designed for insolvent companies, and one for solvent companies:

Compulsory liquidation

One form of insolvent liquidation is compulsory liquidation. Here, a company is forced to close by creditors who are unable to recover debts they are owed of more than £750. Your company’s outstanding creditors can initiate it as a means to recover their debt. This can be done by petitioning the courts to place your company into compulsory liquidation.

If your company goes into compulsory liquidation, then you as the business owner will have almost no control over the process.

Creditors who are owed money can issue a winding-up petition to the court. Once a winding-up petition has been issued, it will be served to the company and advertised in The Gazette 7 working days later. Next, the court will then either approve or dismiss it.

Insolvency Practitioner Appointment

If successful, the court can force the company into liquidation, which will be carried out by a licensed Insolvency Practitioner appointed by the court. Unlike other methods of liquidation, directors will not have any input on who is appointed as liquidator. More importantly, directors could face certain penalties depending on how they acted before the company entered compulsory liquidation. These penalties will be decided by the Insolvency Service, and are applied in cases of director misconduct. Possible penalties include the following:

• The disqualification of a director’s license for between 2-15 years. This disqualification extends to other senior positions, both in companies owned by the penalised director and otherwise.
• Personal liability for company debt.
• Fines in accordance with the severity of the misconduct.
• An order to repay the company a specific lump sum. This is typically reserved for instances where a company illegally issues dividends.
• Prison sentence in accordance with the severity of misconduct or fraud. This penalty is fairly uncommon, being reserved for more extreme cases.

As you can see, compulsory liquidation is the most serious form of liquidation. Although the penalties will not apply in every case, compulsory liquidation does demonstrate that a director has not taken the initiative and acted in the best interests of outstanding creditors. This makes it harder to defend against accusations of misconduct, meaning these penalties are always a risk. If you are threatened with compulsory liquidation, it is always best to act quickly to ensure that more options remain open to you, including voluntary liquidation.

Creditors’ Voluntary Liquidation (CVL)

The other main form of liquidation for insolvent companies is Creditors’ Voluntary Liquidation. Unlike compulsory liquidation, voluntary liquidation is a completely voluntary process that is initiated by the company directors and shareholders.

Creditors’ Voluntary Liquidation is entered into by a director that chooses to voluntarily end the business and liquidate all of its assets. This is an option open only to insolvent companies and is a good way for the director to take control and close the business before it is forced into compulsory liquidation.

Again, a CVL is a formal insolvency process, and as such, an Insolvency Practitioner must be appointed to carry out and oversee the process. Unlike compulsory liquidation, directors are able to appoint an insolvency practitioner of their choice under a CVL. This insolvency practitioner will then take the role of liquidator. Directors will relinquish control over the company to the liquidator, who will identify company assets, dispose of them for the best price, and distribute the proceeds amongst outstanding creditors. Any debts that remain after all funds have been distributed will be written off, assuming they are not secured by personal guarantees.

CVL Advantage

One advantage of a CVL is that it shows that the company director has taken proactive steps towards meeting their debt obligations and paying back creditors the money they are owed. For directors, this is an incredible advantage. If directors demonstrate a willingness to act in the best interests of creditors, then it becomes much more difficult for third parties to level accusations of misconduct. Even if such accusations reach the courts, the CVL procedure is a very strong defence. The CVL procedure offers one final benefit in terms of legal protection. Namely, once a company enters into the procedure, it is protected from legal action initiated by creditors. In essence, this prevents creditors from petitioning for compulsory liquidation.

The director is showing that they acknowledge their legal duties to creditors, therefore mitigating any risk of wrongful trading.

More options will be available to the director in the future if they choose to act, with the opportunity to open another business if, they wish, remaining open to the director.

In both types of insolvent liquidation – Creditors’ Voluntary Liquidation and compulsory liquidation – an Insolvency Practitioner will conduct an investigation into the company’s transactions and the conduct of directors. This investigation is conducted to either find evidence of misconduct or fraud, or rule it out.

If any evidence of wrongdoing is discovered, it will be reported to the Insolvency Service and could lead to fines or a director’s disqualification. If this is the case, the director can become personally liable for any debt.

Members’ Voluntary Liquidation (MVL)

Although not a relevant option for companies facing financial issues, the MVL procedure is an exceptional liquidation procedure that still bears mentioning. Should a struggling company be returned to profitability thanks to an effective business rescue plan, this procedure is one worth knowing.

As we mentioned, the MVL procedure is available only to solvent companies. Moreover, it is an option best taken by companies with a large enough reserve of retained profits to justify the cost of the procedure. Most companies that enter into an MVL have retained profits of at least £25,000.

Assuming your company meets the requirements, and has a reserve of retained profits, then you can get started with the procedure. Before you can appoint an insolvency practitioner to carry out the MVL, you will need to sign a Declaration of Solvency. In essence, this document declares that, to the best of your and your fellow directors’ knowledge, your company is solvent. Once signed and submitted, you can appoint an insolvency practitioner and get the procedure underway. Your insolvency practitioner will ensure assets are sold at the highest price, distribute the proceeds amongst you and any other shareholders, and cleanly wind up your company. At the end, your company will be closed and removed from the Companies House register, marking its end as a legal entity.

Efficient Closure

While the MVL procedure is an efficient means of closing a solvent company, this is not the procedure’s only benefit. The main perk to using an MVL is tax efficiency, which is afforded in two ways. Any gains realised as a result of the MVL procedure, such as the sale of assets, will be taxed under Capital Gains Tax (CGT) rates. CGT rates are much lower than Income Tax rates, which apply to gains made in other methods of closing a company. Directors who are eligible may also apply for Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief. This relief can considerably reduce your tax burden when combined with the already low CGT rates, though it does have a lifetime limit of £1 million. Any gains in excess of this figure will not benefit from BADR.

Option 2: Business rescue

Liquidation is certainly an effective solution for companies struggling with their debts. It removes the burden of debt and ensures the clean closing of a company. While this is helpful in some circumstances, it isn’t a great fit for every company, especially for ones with a viable business model. However, if a licensed Insolvency Practitioner believes that a company has real chances of rescue, a different set of options will be open to you, including:

Company Voluntary Arrangement (CVA)

For insolvent companies looking for business rescue, a Company Voluntary Agreement can be a good route forward.

This is a legal agreement between a company and its outstanding creditors to repay a fixed amount that is lower than the outstanding debt. Payments are normally made monthly, and the remaining debt is written off at the end of the agreed term, enabling the company to continue trading.

Company administration can still end in liquidation even after the implementation of a recovery plan, and the administrator must inform the company directors at an early stage if this looks likely. However, unlike liquidation, administration offers a lifeline to financially distressed companies seeking to rescue their business.

With a CVA, a licensed Insolvency Practitioner will be appointed to put forward a formal proposal to creditors to help find a way to turn the business around and restore profitability.

Here, both the directors and creditors come to a formal agreement where the creditors will accept a sum of money as a way of settlement towards the debts they are owed. 75% of the creditors must agree for this to progress.

Once this is agreed, the company can continue to trade, and the director will remain in control.

What Is Administration?

Another option for insolvent businesses looking for rescue is to enter into administration.

This is an option that aims to take control of the company’s assets and repay creditors the money that is owed to them.

When a company goes into administration, they are given protection against any legal action. An Insolvency Practitioner is appointed as the administrator, and whilst they are overseeing the case, no other party can apply to wind up the company.

Unlike liquidation, administration can help to rescue a business by protecting it and its assets from claimants during a process of restructuring. When a company enters administration, it is protected against all legal action for a period of 8-10 weeks. Once an administration order is approved, an administrator – known as an Insolvency Practitioner – is appointed to oversee the company’s operations. The IP is given far-reaching powers over the company during this period.

Business Rescue Plan

One of the first acts undertaken by the administrator is to formulate a recovery plan which must be approved by a majority of the company’s creditors at a creditors’ meeting. The administrator must by law act in the best interests of the creditors, but by creating a rescue plan that enables the repayment of as many debts as possible, the company’s position also improves.

Formulating and implementing a business rescue plan is only one facet of company administration. As we mentioned, administrators must balance the rescue of a company as a going concern, and the interests of creditors. This means that if a business rescue plan doesn’t work, the administrator must look elsewhere.

If a business rescue plan doesn’t return a company to profitability, then administrators may pursue two other goals. The first is to sell a part, or all, of the company in question. Partial sale could be anything from company assets to entire departments. The sale would serve two purposes; reducing business expenses, and paying off debts. If even this action isn’t enough to relieve a company of its debts, then the administrator will pursue liquidation as the last course of action.

Pre-pack Administration

Entering administration may be a good option for any company faced with compulsory liquidation. One increasingly common type of administration procedure is known as a ‘pre-pack sale’. This can take place when the directors have enough available funds to purchase and transfer the company’s contracts, property, and other assets to a newly formed company.

It is important to understand that the administrator has a statutory duty to market the business for sale, and should a better offer be made by a third party, then the IP is duty-bound to accept that offer. In most cases, however, the existing directors are the only parties interested in purchasing the business.

In a pre-pack administration arrangement, the sale is usually made quickly, and creditors do not have the opportunity to vote against it. However, delaying the sale to allow a vote would likely result in a reduction of the value of company assets that would ultimately harm creditors.

Let Clarke Bell help you with the next steps

If your company is having serious cashflow problems and you’re considering liquidation or looking for ways to turn things around, Clarke Bell can help you.

Over the past 28 years, we have helped thousands of company directors. So, you can rest assured that you are in safe hands.

To find out more about how we can help you, get in touch today.