Depending on the aim of the company and the severity and character of its insolvency, different options are available.
The cheapest way for an insolvent company to save its business is to negotiate payment terms with its major creditors to, for example, delay payment. This doesn’t involve any insolvency procedures. However, it may be difficult for all the necessary creditors to reach an agreement at the same time. Moreover, the creditors are unlikely to agree to payment plans if the company has no prospect of honouring its promises to make payments at a later date. If such voluntary payment plans cannot be reached with all necessary creditors, other options will need to be considered.
Formal arrangements: Company Voluntary Agreements (CVAs) and Schemes of Arrangement
An alternative to reaching a consensual agreement (eg agreeing on a payment plan) is making formal arrangements with creditors. This option is efficient since it overcomes the hurdle posed by creditors not all agreeing on a repayment plan. Once a certain proportion of the company’s creditors (or a proportion of the creditors within a class of similar creditors) have voted in support of an arrangement, the arrangement binds all of them.
There are two possible arrangements: the Scheme of Arrangement and the Company Voluntary Arrangement (CVA).
A Scheme of Arrangement is a binding legal agreement between a company and its creditors that has been approved by the courts. Schemes of Arrangement can be used to implement a broad variety of restructuring measures (eg delaying repayment or exchanging debts for shares). Once approved by creditors and the court, a Scheme becomes binding on the relevant creditors, including secured creditors. They are flexible and can range in scope, and may be preferred as they are governed by the Companies Act 2006 rather than insolvency law, so using them helps companies avoid the stigma of using strict ‘insolvency’ practices.
A CVA is an agreement between a company and its creditors to put in place a timetable for the repayment of debts. This allows the company to attempt to trade itself out of financial difficulty. Where this isn’t possible, it’s used to achieve a better result for creditors than if the company was wound up. CVAs are usually less costly than Schemes of Arrangement because they don’t always involve the courts. However, they can be less effective as they’re often only binding on unsecured creditors.
Administration is a short-term insolvency mechanism that allows a business to continue trading whilst an appointed administrator attempts to pull the company out of insolvency so it doesn’t have to be wound up.
If a business can still be rescued but the company requires protection from creditors’ legal actions (ie claims to recover debt), administration is usually the appropriate option. Companies tend to enter administration first, followed by, if required, formal arrangements or liquidation.
Distinct features of administration include:
the suspension of creditors’ rights to take specific actions without the administrator’s or court’s consent (known as a ‘moratorium’)
the appointment of an administrator who takes over the management of the company
For more information, read Administration.
Liquidation is an insolvency process used for companies that cannot be saved (eg once administration has failed). Liquidation is usually the last resort for companies. Its primary function is to sell the company’s assets for cash to repay the debts owed to creditors. There are two types of liquidation: compulsory liquidation and voluntary liquidation.
For more information, read Liquidation and Closing a limited company, and see our Checklist for closing your company.