Avoiding Liquidation

If circumstances allow, it may be possible to avoid insolvency via negotiations and voluntary arrangements with each of the company’s directors.

When would a company need this service?

If a company finds itself under pressure from creditors to make payment of sums but are unable to satisfy those debts in full, the company may be considered to be insolvent and could be subject to liquidation.

There are various options available for companies to reach an alternative arrangement with all of its creditors in order to avoid Liquidation or Administration. The most popular are Informal Agreements and Company Voluntary Arrangements (CVA).

An Informal Agreement is agreed and evidenced in writing and has a significantly lower impact than a CVA. There are a number of advantages and disadvantages to Informal Agreements.

Advantages:

• Terms can be bespoke;
• An informal agreement facilitates ongoing business relationships and trading;
• Can be less costly than formal insolvency procedures; and
• Not publically known and therefore no/limited reputational damage to the company.

Disadvantages:

• Will only bind creditors who are party to the agreement;
• Will not automatically bind all unknown, unsecured creditors;
• Any creditors who are not a party to the agreement can proceed with insolvency proceedings against the company; and
• Will not prevent a creditor from deviating from the agreement and commencing insolvency proceedings (though the existence of such an agreement may persuade the court to adjourn and/or dismiss such proceedings).

Company Voluntary Arrangements (CVAs)

A CVA is a written agreement between the company and all of its unsecured creditors. The company will make either a lump sum payment or regular payments (or a mix of both) into a ‘pool’ from which the Supervisor of the CVA (a licenced insolvency practitioner), then distributes to the known creditors on an equal, sharing basis.

Whilst it is a formal insolvency procedure, it can often be a cheaper alternative for the company than Liquidation or Administration. The primary objective of a CVA is to prevent Liquidation by helping companies which have a good underlying business but which have otherwise hit a cash-flow problem.

The outline of the process is as follows:

• Written proposals of the directors, often with the assistance of the nominated insolvency practitioner (Nominee), are put to the creditors;
• The Nominee files their report on the viability of the proposals;
• The creditors are required to vote on the proposals whether they:
  • Agree to the proposals;
  • Agree but request modifications to the proposals; or,
  • Object to the proposals.
• For the proposals to pass and bind all creditors, 75% or more in value of the unsecured creditors’ agreement is required;
• In the event the proposals are approved, then all creditors, save for ‘secured’ creditors and ‘preferential’ creditors who did not agree, are bound;
• The Nominee becomes the Supervisor and oversees the implementation of the CVA and adherence to it by the company and directors;
• At the end of the term, usually 60 months, the Supervisor will submit a final report.

Advantages:

• A CVA offers an opportunity to rescue a company during a difficult financial period;
• Creditors may recover a higher percentage of the debt owed than if Liquidation or Administration were commenced;
• A significantly cheaper alternative to Administration;
• Small companies may benefit from a period of protection from action by unsecured creditors (called a ‘moratorium’); and
• Allows the directors to continue to run the company

Disadvantages:

• A CVA potentially places the company at the mercy of a majority creditor;
• Larger companies may not benefit from a moratorium and so will need to act more quickly to have a CVA approved before a creditor takes action; and
• A CVA offers no guarantee that Liquidation or Administration will be avoided.

There are a number of alternatives to Liquidation and Administration which may be available to a struggling company. Our team of legal experts at Bankruptcy Solicitors would be happy to discuss these with you.

To allow our specialist lawyers to assist you, please provide the following information:

• The names of all creditors;
• Details as to whether they are secured or unsecured creditors;
• The amounts owed to each creditor;
• Details and the nature of your relationship with each creditor;
• Details of any debtors you may have who are likely to make payment in the near future; and
• A recent set of company accounts, including profit & loss accounts, and balance sheets.

How much does it cost?

At the outset, we will provide you with an estimate of costs based on the type of work required.

For more information on the options available to avoid liquidation, please contact our team of experts by emailing insolvency@bankruptcy-solicitors.com or call 020 8308 3610 today.