When a business faces insolvency, decisions must be made as to which insolvency route will be best for the company and its creditors. A company may go into administration, liquidation or a voluntary arrangement. The term bankruptcy generally refers to personal bankruptcy – when an individual rather than a business (a partnership or a limited company) becomes insolvent.
If your company is insolvent but part of the business is probably salvageable and could conceivably continue, the best route is likely to be administration, or pre-pack administration. A pre-pack administration refers to situations where there is already a purchaser in place to buy the viable part of the business and that all terms of the sale have been agreed before the administrator is appointed. The administrator controls the business during the insolvency and the process of paying creditors and selling the business is completed.
One of the benefits of administration is that a company is protected from its creditors during the process, and that the procedure can increase the amount of money that is returned to the company’s creditors. It is possible for companies entering into administration to successfully exit the process without being formally closed down.
Company Voluntary Arrangement (CVA)
A CVA is another option for companies, and it is generally useful for those companies that are finding themselves with problems with cash flow, and thus creditor pressure. As a result of an unpaid debt to a company or a contract going wrong, this can happen to any company, and a CVA can assist such companies to continue trading through an insolvent period.
A CVA is therefore the ideal solution for companies that are likely to return to profitability in the near future. It is a payment plan tailored to repay creditors typically between 25% and 60% of the total debt over a relatively short period of time on the basis of payments that are affordable to the company.
Insolvency practitioners such as http://www.antonybatty.com/bankruptcy-advice/ have specialist knowledge of the law in this area and can assist businesses that are facing insolvency but where there is real evidence that the company could make a profit in the medium to short term.
A company enters liquidation (also called “winding up”) when there is no part of the business that can be saved or is worth saving. During the liquidation process, the company’s assets will be realised and distributed to the creditors following a legal order of priority. After the liquidation process, the company will be removed from the companies’ register. Some companies will enter this process following administration.
If the court orders the liquidation of the company, it is a Compulsory Liquidation. If the shareholders resolve to enter liquidation, it is voluntary. If the company is still solvent (there is a legal definition of when a company may be considered insolvent), then it is referred to as a Members Voluntary Liquidation. This is because the shareholders will still primarily be in control of the company during the process. If the company is insolvent, it will be a Creditors Voluntary Liquidation because during the process the company’s creditors will be in control.