If the business has no chance of surviving, it is important to obtain advice from an insolvency expert to assess the merits of Insolvency.
By this process the company ceases trading, its assets are sold and the proceeds are distributed amongst its creditors (this is known as ‘liquidation’ or ‘winding up’). At the end of the liquidation, the company ceases to exist. A licensed insolvency practitioner will be appointed as the company’s liquidator, to carry out and oversee this process. Once a liquidator is appointed, the directors’ control over the company ceases and all powers vest in the liquidator instead.
If the underlying business of the company is sound but it is technically insolvent (either on a cash flow basis or a balance sheet basis), it may be possible to restructure the company in such a way as to protect the underlying business instead. The main vehicle for achieving this will be through an administration order or company voluntary arrangement, Commercial mediation instead of a liquidation. You must take professional advice on the best option in your circumstances.
Administration is, essentially, a process whereby the company is given a breathing space within which to reorganise its affairs. An administrator is appointed (by the company or by a lender such as a bank), and takes control of the company’s assets and its business. The administrator will continue trading, and tries to put the company back on a sound footing. If they succeed, they hand it back to the directors to continue as before. If the administrator cannot save the business as a going concern, they at least try to get a better return for creditors, or sell the company’s property so that as many creditors as possible receive something. While the company is in administration, no-one (including lenders or landlords) can wind it up or repossess plant and machinery, cars, stock, etc.
Since the implementation of the Enterprise Act 2002 the administration process has been greatly simplified and it will often be possible for the directors to put the company into administration without even making an application to the court. An administrator must be a licensed insolvency practitioner.
A company voluntary arrangement (‘CVA’) is essentially a contract between a company and all of its creditors whereby they reach a compromise settlement. Typically, the creditors will accept a reduced payment over a period of time in return for which the company is able to continue trading – and thereby provide the creditor with ongoing business. Often, the alternative for the creditors will be a nil return on the liquidation, so the CVA is a better option. The process is supervised (but not controlled) by a licensed insolvency practitioner.
To achieve a CVA it is therefore necessary to appoint a licensed insolvency practitioner to be Supervisor and also to obtain the agreement of 75% by value of the creditors. For the majority of companies it will be possible to obtain a moratorium against all creditor enforcement action and all litigation whilst the CVA process is being put in train. However, CVAs are not common – although they most frequently occur immediately after an administration.
Finally, there is administrative receivership but this is not something over which the directors of the company will have control. A receivership is, essentially, a debt recovery tool available to holders of floating charges — that will, in most cases, mean your bank that were entered into before 15th September 2003. For charges entered into after that date, the procedure is not available – the government’s aim is to push banks and others towards an administration instead.