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How do I rescue my business?

While it’s often hard to face up to, if you have concerns that your business is in financial difficulty then the earlier you seek help the better. This page looks at the formal procedures that can be undertaken to save your business with the help of a Licensed Insolvency Practitioner: Company Voluntary Arrangement (CVA) and Administration. 

What is a Company Voluntary Arrangement (CVA)?

A CVA provides a breathing space for the company; enabling it to improve cash flow by coming to an arrangement with its creditors. This can also involve debt forgiveness (some of the debt being written off). Your Licensed Insolvency Practitioner will act:

  • first as an Advisor, making sure a CVA is right for the company; 
  • secondly as the Nominee to assist the directors to draft the CVA proposal, then as the
  • Supervisor once the CVA is approved.  

In the majority of CVA cases, the company makes affordable agreed monthly payments to the Supervisor who in turn distributes the money on a pro rata basis amongst unsecured creditors. The term can vary. Typically it can be up to five years. The amount paid to creditors can be a repayment in full or a percentage of the debt.

 

The CVA process

1. Speak to a Licensed Insolvency Practitioner. They will act as an Advisor first, discussing and reviewing the company’s position then guide you through your options.

2. The company directors will work with the Insolvency Practitioner to draft a proposal to creditors. This will detail:

  • The company’s history, the reasons why it is in financial difficulty and how it will avoid future problems.
  • The company’s current financial position and future predicted cash flows.
  • The amount the company can afford to pay into the CVA, the term, and the resulting return to creditors.
  • List of creditors.

The insolvency practitioner, acting as Nominee, then issues the proposal to creditors.

3. Creditors vote to either approve, reject or modify the CVA. At least 75% of voting creditors need to vote in favour of the CVA for it to be approved.

4. The CVA starts if approved and the company needs to adhere to the terms, making the payments as agreed. The Insolvency Practitioner acts as Supervisor, ensuring the payments are received, the creditors’ claims are agreed and distributions are made accordingly.

5. The CVA finishes once the terms have been met and the Supervisor issues the final report and a Certificate of Completion.

Benefits and consequences of a CVA

Benefits

Consequences

The CVA enables the company to continue to trade.

The directors need to understand why the company has struggled and make appropriate changes to turn the situation around, otherwise despite the CVA the company could fail.

 

The CVA provides a breathing space from creditors and the company is protected from legal action by creditors.

The company will have to adhere to the terms of the CVA otherwise the Insolvency Practitioner will have to terminate the arrangement, which could lead to the company entering into liquidation. 

The directors are still running the company (the Insolvency Practitioner acts as Supervisor of the CVA).

The CVA is registered at Companies House and will in turn show on the company’s credit file. This will make it more difficult for the company to seek credit during the first part of the CVA. 

Creditors’ debts are frozen – no interest or charges can be applied once the CVA starts.

 

A CVA is a cost-effective alternative to other insolvency procedures.

 

Some of the debt can be written off.

 

What is an Administration?

An Administration is used with the objective of:

  • rescuing the company as a going concern (the business is trading and able to make a profit)
  • achieving a better result for the company creditors than a liquidation 
  • or, as a mechanism to realise assets in order to make a distribution to one or more secured or preferential creditors.

An Administration provides protection from its creditors and breathing space for the company, enabling a Licensed Insolvency Practitioner to take control and propose a plan to restructure or sell the business and assets.  

 

The Administration process

A company can be placed into Administration by two methods:

  • An order of the court, on application, either by:
    • 50% or more shareholders
    • its directors or
    • one or more creditors.
  • Direct appointment by: 
    • 50% or more shareholders
    • its directors (with shareholder approval) or 
    • any creditor who holds a qualifying floating charge (QFC)
    • a lender (who typically has provided a loan or factoring facility) who has taken a charge over company property and has the option to place the company into Administration.

The Administrator will trade the company and arrange for the business and assets to be valued, marketed and sold. Sometimes a pre-pack administration can be undertaken, whereby a buyer is already lined up prior to the company entering into administration.

Proposals are issued to creditors, advising of how it is intended to achieve the purpose of administration. A majority of creditors who vote, by value, is required to approve the proposals.

When the purpose has been achieved the administration can conclude, and either:

  • the company is returned to the control of its directors
  • the company enters into liquidation
  • if there are no funds available to pay the unsecured creditors the company is dissolved.

Benefits and disadvantages of an Administration

Advantages

Disadvantages

To protect the company from creditors and any legal proceedings.

The directors may have to relinquish control of the company. Depending upon the purpose of administration and if the business is sold to a third party, they may also be made redundant.

To enable the company to be restructured, disposing of non-profitable parts and selling valuable parts of the business. 

The administration will be noted publicly, recorded at Companies House, advertised in the London Gazette and must be shown on any correspondence including the company website, emails and purchase orders.

The company may continue trading, often resulting in employees’ jobs being saved. 

It may be more difficult for the company to trade as suppliers are unlikely to provide credit, instead requiring upfront payment. The company will need money available to continue to trade.

The Administrator is duty-bound to work for the benefit of all creditors.

The costs associated with Administration can be high and can escalate quickly if trading the company.

What if my business can’t be rescued?

If, after seeking advice, the conclusion is that the company cannot be saved, then the directors have a duty to take steps to place the company into Creditors’ Voluntary Liquidation (CVL). If directors do not take these steps then creditors can petition to wind the company up in court, forcing the company into compulsory liquidation.

 

What is a Creditors’ Voluntary Liquidation (CVL)?

A CVL is used to close a company that is insolvent and cannot pay its debts. Once the decision is made the company should cease to trade immediately and not worsen the position for creditors. Unless as director you have given personal guarantees, you will not be liable for the company’s debts.

 

The CVL process

1.    Speak to a Licensed Insolvency Practitioner

They will discuss and review the company’s position – the difficulties it has faced, the assets and liabilities and the viability. They will then speak through the options and if the company cannot be saved then advise to liquidate.

2.    Collation of information – the Insolvency Practitioner will need to be provided with:

  • List of creditors – names, addresses, amounts
  • List of assets
  • Business bank account information and balance
  • Employees’ details – names, addresses, amounts owed
  • Company history and the reasons why it has failed

From the information, the Insolvency Practitioner will advise on which decision procedure is used to place the company into liquidation – deemed consent or virtual meeting. (New Insolvency Rules came into effect on 6 April 2017 changing the way creditors are involved in the process.)

3. Notices to creditors

The Insolvency Practitioner shall despatch notices to creditors advising of the impending liquidation and providing creditors with information on the company, including a statement of affairs (the assets and liabilities of the company and the likelihood of a return being paid).

They will also note the decision procedure being used with a decision date (within 14 days).  

4. Decision date

The shareholders will first pass resolutions to place the company into liquidation. A minimum of 75% of shareholders need to vote.

For creditors, if deemed consent is used, the liquidation will automatically start on the decision date; if a virtual meeting then creditors are given the opportunity to question the directors at the meeting and vote on the appointment of a liquidator.

5. Liquidation starts and liquidator appointed

The liquidator will carry out the following:

  • Realise the company’s assets.
  • Correspond with creditors and employees on the progression of the liquidation and if funds allow, agree claims and pay a distribution.
  • Investigate the company’s affairs and the conduct of the director(s).
  • Conclude the liquidation.