Just as you don’t need a hammer to crack a nut, you don’t necessarily need to cease trading or liquidate your business if it is struggling. We explore the other options available.
If the directors choose to place a company into Administration, the directors essentially hand control of the company over to an Administrator (who must be a licenced insolvency practitioner). In simple terms this is a kill-or-cure solution. The Administrator will attempt to quickly stabilise the business and bring it back to good health. The Administrator then has a number of options as how to deal with the company. In rare circumstances where the Administrator makes significant profits or asset sales under Administration, the Administrator may pass control of the company back to the directors. More commonly, the Administrator will either work with the directors to agree a CVA (see below) to allow the company to continue in the longer term. If a CVA is not viable, the Administrator will likely look for a buyer for the business. If none of this options can be achieved, the Administrator will start the process to close the company down in an orderly fashion, usually completing any ongoing work, selling off assets piecemeal and making staff redundancies. A company can spend up to a year in administration before a final decision is taken on its future.
A Pre-pack Administration is when a company enters Administration and where the Administrator, having already been involved behind the scenes, completes a very quick sale of the business once it enters Administration. The business can be sold to a third party, such as a customer or competitor, or in many cases the buyer will be the existing owners or management.
The benefits of pre-pack Administration are that an Administrator can effect a sale quickly, before news of the company’s insolvency reaches the outside world, as this may reduce the value of the business, for example if orders are cancelled or if staff were to leave. Independent academic research has shown that pre-packs have saved many thousands of jobs and R3, the insolvency trade body, has advocated their place in the insolvency market when conducted properly.
However, the speed and secrecy of the pre-pack is the very reason that pre-packs have caused controversy in the past, since it has been argued that this means the business is not made available to the wider market to test what price might be achieved. Also, where a pre-pack sale is to directors or management, it appears that directors can walk away from debt and set up in the same business again the following day.
While there is a certain degree of truth to this, the onus is on the Administrator to justify why a full marketing campaign is either not preferred or not possible. To give creditors another level of comfort, there is also now a body set up by the Insolvency Service that reviews pre-packs before they place, to give an independent view on the Administrator’s judgment.
Company Voluntary Arrangement
A Company Voluntary Arrangement is a formal payment plan between a company and its creditors, which sets out how much the company can afford to pay back to creditors and over what timescale (usually 5 years). In order to take effect, a CVA must be approved by at least 75% (by value of debt) of the creditors who vote. As long as this is achieved a CVA can be put in place even if there are objections from the creditors holding the remaining 25% of the debt.
The directors retain control of the management of the company and the company pays a monthly sum to the insolvency practitioner, who will distribute the funds to creditors over the life of the CVA. Once the CVA ends, any balance still owed to creditors is written off.
If a company can afford to pay off its debts but does not have a future as a going concern, then it may be possible for the directors to apply to Companies House to have the company removed from the companies register in a process known as dissolution. This might apply if, for example, a company finds itself struggling due to the departure of a key member of staff in a service-orientated business, or if a company’s only customer decide not to purchase from it any longer.
Dissolution does nothing to absolve the company of its existing debts, however all creditors of the company need to be notified of the dissolution application, and any creditor may object to the dissolution if they still have monies owed to them.
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