Updated: 11th October 2021
The UK operates a supportive regime of insolvency procedures for companies experiencing financial difficulty. This means that liquidation isn’t necessarily the only option, even if a business is in severe financial decline.
Many factors influence a company’s success or failure, many of which are outside the control of directors. A business may be suffering temporary difficulties, for example, which can be overcome given a little more time.
The liquidation process for insolvent businesses that cannot be rescued is Creditors’ Voluntary Liquidation, or CVL. This permanently closes the business down following realisation of its assets.
Company Voluntary Arrangement, on the other hand, is a formal insolvency process that allows an essentially viable company to carry on trading without the threat of creditor legal action. It means you retain control as a director with a view to steering the company away from liquidation.
A Company Voluntary Arrangement involves formal negotiation between a licensed insolvency practitioner (IP) and your creditors. As it’s an official process it can only be carried out by a licensed insolvency professional.
If agreement is reached with 75 per cent of creditors (by debt value), debts are restructured. This allows the company to repay some or all of the outstanding debt at an affordable monthly rate, typically over 3-5 years.
The monthly repayment is distributed between creditors in the pre-agreed proportions, and as long as you maintain the payment schedule, no legal action can be taken by creditors to close the business down.
One of the main eligibility criteria for a CVA is long-term viability. The IP must believe the business can sustain the new payments for the full term of the arrangement, as if the CVA fails at any point creditors can petition to wind up the company.
It may be the case that you only repay a proportion of the original debts, and the remainder are written off. Either way, a CVA offers you the chance to start again without debts and relentless creditor pressure, and can be a good option if the circumstances are right.
Sometimes Creditors’ Voluntary Liquidation is the only available option for failing businesses. If this is the case, it can benefit directors as well as creditors by relieving the pressure of trying to rescue a collapsing company.
As a director you have a degree of control over the process – you can appoint your own choice of liquidator and decide when to enter liquidation. If you waited for enforced liquidation by a creditor, this wouldn’t be possible as the matter is taken entirely from your control.
Having entered into a CVL, the liquidator sells the company’s assets to provide creditors with the maximum dividend possible. When the process is complete, the company is removed from the register and ceases to exist.
Although it means the company closes down, Creditors’ Voluntary Liquidation does offer certain benefits. It allows you to meet your legal obligations as a director, relieves creditor pressure, and allows you to move forward.
Importantly, it can also entitle you to claim director redundancy pay. If you’re wondering how your company would pay for an insolvency process when it’s being liquidated, many directors claim redundancy pay and use some of the money to cover the costs.
As the average claim for director redundancy is £9,000, there may also be money remaining that you can use to support your personal financial situation, or repay some of the company’s debts.
The fact that you can meet your legal obligations is also important, as if you fail in this respect you could be disqualified or even held personally liable for the company’s debts.
The two processes are extremely effective in their own right – it’s the circumstances of your business that dictate which one represents the best course of action. There may also be other suitable formal insolvency procedures available, or perhaps informal options such as additional funding.
An insolvency practitioner would assess whether the company can be rescued, and offer professional advice and guidance. If your company is fundamentally viable and suffering short-term financial distress, a CVA may be appropriate.
It’s imperative to obtain professional guidance as early as possible, as you may have more options available. If your company is already insolvent, or you believe it will be in the near future, you have a legal obligation to seek support from a licensed IP.
Real Business Rescue are insolvency specialists and can provide the reliable independent advice you need. Please get in touch with our partner-led team to arrange a free, same-day consultation. We work from offices throughout the country, and can quickly provide support wherever you’re based.