In the present economic climate, insolvency issues arise frequently, but the range of different forms of insolvency, options and consequences presents a minefield for anyone unfamiliar with this complex area. ibv have been involved with many businesses where insolvency processes have been undertaken to achieve the best possible result in the circumstances for creditors and owners. In many cases, where a company goes through an insolvency process, it will be possible for the current owners to purchase the trade and assets from the Administrator if that is the best option available. After providing an initial assessment of your situation, where required we work with our insolvency partners to undertake the insolvency process.
Company insolvency is a situation whereby a company is unable to pay its debts when they are due to be paid. There are two basic definitions of business insolvency, namely cash flow insolvency where the company cannot pay its debts due to a lack of cash, and balance sheet insolvency where the assets of the company, including those that cannot be immediately realised for cash, are less than the total sum owed. In other words, the company's liabilities exceed its assets.
Directors should always be aware of their responsibilities if they continue trading when a company is insolvent, if they are found to be in breach of their responsibilities, they can be held personally liable for the debts of the company. If you have any doubts about your situation, you should immediately obtain professional advice.
The various types of corporate insolvency options are summarised below:
Administration is one of the options open to insolvent businesses. It allows the reorganisation of an insolvent company, whilst protecting it from its creditors. It allows you to hold your company together while plans are formulated to rescue the business, maximise asset realisations, or put forward alternative options. Administration can be initiated by directors and used very effectively as a restructuring mechanism. Where the company has a viable future, it provides a breathing space in which proposals can be put to the creditors.
This is a powerful, legal way of selling the business on to a third party, a "Newco" or to the existing directors if the business is facing serious problems and creditor threats. The main advantages of pre-pack administrations are continuity of the "business" and when the plan is ready a contract of purchase is drawn up, the company is quickly protected by the Court while the administrator sells the "business and assets" (not the actual company) to the new owners. This gets rid of debts, unwanted or onerous contracts and employees (in certain circumstances there could TUPE issues that are quite difficult) and there needs be no interruption to the business which in itself can destroy value.
Another big advantage is that the cost of the process is lower as the administrators do not need to find funding to trade the business. The process, once the preliminary marketing, valuation work and discussions with creditors are completed, can be very quick and completed in a couple of days if necessary. If the business is to be sold to a connected party, i.e., the former directors, they will need to be able to fund the acquisition of the assets. However, the assets will need to be independently valued.
Of course, a pre-pack can generate negative publicity if the former directors are seen to be just shedding liabilities. However, it should be remembered that the business was already insolvent prior to any appointment, and a protracted process ending in liquidation could have been the alternative with the loss of many jobs and a reduced dividend for creditors.
Under a Company Voluntary Arrangement (CVA), trading continues and a repayment scheme is agreed with creditors. A CVA, which is legally binding, aims to allow the business to survive as a going concern, or achieve better realisation of the company's assets.
A review may conclude that a business is insolvent and continued trading in the long term is impossible. In these circumstances, steps must be taken to place the company into a formal state of insolvency in order to protect the position of the creditors and directors. An Administrative Receiver has wide powers allowing trading to continue and preserving the ability to sell the business as a going concern. Even if the business cannot be sold, actions can be taken to enhance asset value prior to realisation.
Liquidation is usually the legal closing down of a business which may be solvent or insolvent. Liquidation may occur following a receivership or administration. Alternatively, the company's directors or shareholders may recommend that the company be put directly into liquidation via either a Creditors Voluntary Liquidation (CVL) or a Members Voluntary Liquidation (MVL) or a Court can make a winding-up order for a compulsory liquidation on the petition of a creditor or the company itself.
Creditors' Voluntary Liquidation (CVL)
This occurs where the shareholders, usually at the directors' request, decide to put a company into liquidation because it is insolvent. Either the company cannot pay its debts as they fall due or it has more liabilities than assets. The purpose of the liquidation is to appoint a responsible person who has a duty to collect the company's assets and distribute them to its creditors in accordance with the law. That person is the liquidator who must be a licensed insolvency practitioner.
Members' Voluntary Liquidation (MVL)
A solvent liquidation is known as a Members' Voluntary Liquidation in which a liquidator is appointed by the shareholders and the company's assets are sufficient to settle all its debts within twelve months. MVLs may be used for the purposes of reorganisation, or in the case of owner managed businesses to enable the shareholders to realise their interest in the company. The company's tax position can however be critical and expert advice should be taken.
A compulsory liquidation is usually where a creditor has petitioned the Court for the winding up of the company. This is also known as a 'compulsory winding up'.