Whilst we assist businesses to navigate their challenges, sometimes a business needs a formal insolvency process to deal with its indebtedness. There a number of different insolvency processes and each one has a different role in the rescue and insolvency landscape.
Company Voluntary Arrangement
A Company Voluntary Arrangement (“CVA”) is used to facilitate a rescue of a business which may have suffered an event and would have otherwise been viable. It is a formal insolvency procedure. Directors remain in control of the business whilst it is subject to the CVA, with a Licensed Insolvency Practitioner overseeing the process, firstly as Nominee and then, following the approval of the CVA, as Supervisor. It is dependent upon 75% of creditors voting in favour of the proposals for the CVA and secured and preferential creditors’ rights remain unless they consent to any changes. Once approved, creditors are bound by the terms of the CVA, which usually lasts over a period of three to five years, and allows the company to make contributions into the CVA for the benefit of creditors from its ongoing trading.
Administration
Administrations are the most high profile of company insolvency procedures. If the directors are seeking to rescue the business as a going concern and a CVA is not appropriate, then an Administration can be used instead. An Administration can be instigated by the company or its directors, a holder of a qualifying floating charge (i.e. a secured lender or bank) or via a Court order. An Administrator is appointed to manage the business, assets and property of the company and the directors lose control of the business whilst the company is in Administration. Whilst the process can be used to rescue the company as a going concern, it is more often used to maximise realisations for the benefit of the creditors, either through a sale of the business as a going concern, or through a managed wind-down, if a business rescue is not achievable. A sale of the business can also be achieved via a “pre-pack” sale, where a purchaser agrees the sale prior to the appointment of Administrators, with the sale completing following the Administrators being appointed.
The Administration also comes with a moratorium, which prevents creditors from continuing with any enforcement or legal action. This can prove helpful where assets may be at risk, where creditor pressure is increasing and there is threat of winding up petitions being served or a landlord is looking to enforce their rights under the terms of the lease.
Liquidation
A Liquidation is the more appropriate option where there is no likelihood of rescuing the business or where the business has come to the end of its lifecycle.
Where the company is solvent, the shareholders can place the company into a Members’ Voluntary Liquidation (“MVL”), where a Liquidator is appointed to distribute the remaining assets to the shareholders in a tax-efficient manner. The Liquidator is able to distribute assets (“in specie”) as well as cash to the members and the distributions are treated as capital distributions rather than as income distributions from a tax perspective. The Liquidator is also able to deal with any contingent liabilities, therefore bringing peace of mind to the members during the closure process.
Where the company is insolvent and unable to pay all of its debts and there is no chance of rescuing the business, then the directors can choose to place the company into a Creditors’ Voluntary Liquidation. The members will need to resolve to the company being wound up and appoint a Liquidator, but the creditors will then have the final say in who is appointed Liquidator. Once the company is in Liquidation, the Liquidator will seek to realise any assets for the benefit of creditors. Once the Liquidator has finalised the position, the company will then move to dissolution.
The final type of Liquidation is a Compulsory Liquidation, which is initiated through the Court through the presentation of a winding-up petition. The Court will then grant a Winding Up Order and the Official Receiver is appointed as the Liquidator. A Licensed Insolvency Practitioner may be subsequently appointed as Liquidator if the creditors seek an appointment or if the OR decides to appoint a Liquidator.
Receivership
A receiver is appointed by a lender of a fixed charge over some or all of the company’s assets. The Receiver has a primary duty to the holder of the charge under which they have been appointed. There are usually two main types of Receiver – a Fixed Charge Receiver and a Law of Property Act (“LPA”) Receiver. Both have limited powers, which are generally to realise the assets over which they have been appointed for the benefit of the charge-holder.
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There are many different options available to directors and business owners who are facing financial distress. Seeking advice early from our experienced team will ensure that you are given the advice and solutions which are tailored for your situation
