Insolvency and Restructuring

It can be a daunting prospect to see debts piling up, whether caused by a cash flow issue, a down-turn in the market or for some other reason. If you find your business struggling, you have a range of options, including:

Restructuring

This is the reorganisation of a business’s structure, operations and liabilities (with the creditors’ consent) to enable it to repay its debts and avoid insolvency. We regularly advise businesses on restructuring considerations, such as:

• Ring fencing assets
• Tax implications
• Reorganising staff or implementing redundancies
• Selling parts of the business
• Seeking private equity investment or refinancing borrowings
• Reducing share capital
• Renegotiating contracts
• Demerging

Pre-packs or pre-packaged insolvencies

In a pre-pack, the insolvency process is managed to minimise the disruption to the business.  The business is sold as soon as the insolvency practitioner is appointed, usually in an administration procedure, but sometimes in a liquidation.  The sale may be to an outside investor, a competitor, a customer, or a supplier, but very often it is to a buy-out company run by the existing management of the business

Company Voluntary Arrangements (CVAs)

A CVA is an agreement between a company and its creditors to repay the debts over a fixed period of time. At least 75% of your creditors must approve the CVA.

Company Voluntary Liquidation (CVL)

This is the process of voluntarily winding up your company and appointing a liquidator to sell the company’s assets and distribute the proceeds to the creditors. Choosing voluntary insolvency can have many benefits, including control over who is appointed as liquidator.

Administration

Administration is designed to provide your company with protection from creditor legal action while a rescue plan is formed and implemented. An administrator will be appointed to handle the process and if successful, could result in a positive future for the company. However, if the administrator cannot rescue the company, there is a chance it could be liquidated or sold.

Moratorium

Moratorium is the new procedure in the Insolvency Act 1986 from the Corporate Insolvency and Governance Bill that gives insolvent companies a breathing space for a short time.  It protects the company from creditor legal action while the directors work with an insolvency practitioner appointed as monitor of the moratorium.  Administration also sets up a similar moratorium to protect the assets of the company. 

The moratorium procedure is designed to pave the way for a CVA company voluntary arrangement or scheme of arrangement under the Companies Act 2006 Part 26 or Part 26A (based on reconstruction schemes of arrangement under section 425 Companies Act 1985)

A Creditors’ Voluntary Liquidation (CVL) involves the directors choosing to wind up their insolvent company. This is a last resort for a company and usually only occurs where there is no viable future for the business and no indication that it can become profitable again.

The benefit of choosing a CVL is that it allows the directors to move on as quickly as possible while allowing the creditors to recover as much money as possible.

The CVL process typically works as follows:

• There is a meeting of the board of directors to agree that CVL is the right course of action, usually decided after receiving advice from an insolvency specialist, and to convene a shareholders’ general meeting and a decision of creditors to decide on what date to commence liquidation
• An Insolvency Practitioner is appointed to handle the CVL process
• The creditors are provided information about the financial situation of the company
• At the general meeting of shareholders, at least 75% of shareholders must agree to wind the company up. No physical meeting of creditors is required (unless requested by a certain amount)
• The company officially goes into liquidation and the Insolvency Practitioner takes control to handle claims (such as employee claims), deal with the company assets and distribute money to the creditors
• Once the liquidation is complete, the company is struck off the register at Companies House and ceases to exist. Any debts still outstanding are written off

If your company has significant debts, you could be forced into compulsory liquidation. This is the process by which your creditors apply to court to close your business, appoint liquidators and distribute your company’s assets to repay their debts.

A creditor can start the compulsory liquidation process by first issuing a statutory demand against you to repay their debt. If you are unable to repay, they may file a winding up petition at court. Upon receiving the petition, you can either accept the position that you are insolvent or defend the petition. It is important to seek legal advice as soon as possible after receiving a statutory demand or winding up petition to ensure you make the best choice for your business.

If the court agrees that your business is insolvent, they will make a winding up order and your company will be liquidated. The court will appoint an official receiver to handle the liquidation and your business must stop trading.

The official receiver will take control of the company from the directors and deal with all claims, sell assets and repay creditors. Once the liquidation is complete, the company will be struck off the register at Companies House and cease to exist.

The general rule is that in a limited company, the directors are protected from personal liability for business debts. However, there are some situations where claims can be made against the directors, such as:

Personal guarantees

If a director has provided a personal guarantee for business debts, the creditor may enforce their debt against the director, even if the company has been dissolved.

Breach of directors’ duties

Directors have an essential legal duty to take all possible steps to ensure the repayment of creditors upon the company’s insolvency. This means that they cannot show preferential treatment to any creditors or continue trading when the company is insolvent. If they do, they could face personal liability and even disqualification from acting as a director in future.

In some circumstances, if a director continues trading with the intention of defrauding creditors or when they should have been aware that the company was insolvent, they could be held liable for fraudulent trading or wrongful trading.

We can help with this. 

If you are an insolvency practitioner working on a proposed MVL and the director needs a solicitor to witness a declaration of solvency click here.

If you are a director liquidating a company, in a solvent winding up (a 'members' voluntary liquidation' or MVL and you need a solicitor to witness a declaration of solvency click here.

A phoenix sale is the purchase of an insolvent business by its previous management.  The business goes bust, and then re-opens, very quickly, looking much the same as it did before.  Understandably, people owed money from the failed business often think this should not be allowed. 

New regulations were put in place on 30th April 2021 to limit this, you can read about them here.

Typically, s110 is used to split a company that owns two businesses into two companies, each owning one business.  This might happen if a family business has been passed down the generations and evolved into two distinct divisions.

A s110 can only be used under the below circumstances:

·        The first condition is that there has to be a solvent voluntary liquidation. 

·        The second condition is that you need a transfer of business property.

·        The third condition is that the purchaser has to be a company, or an LLP. It doesn't have to be a Companies Act company. It can't be a single individual, or a partnership.

Read more here.