Most, if not all, company directors and shareholders will have to make tough decisions throughout the lifespan of a company. However, we recognise that the toughest one of all can be deciding how to exit a company when plans to rescue or restructure have failed.
On the back of our last article explaining the importance of pre-planning in Members’ Voluntary Liquidations (MVLs) which can give directors and shareholders a tax advantageous route to exit a solvent company, we’ve set out below a summary of some useful processes to assist in exiting an insolvent company. With the guidance from a licenced insolvency practitioner (IP), this can help reduce the headache and mitigate the personal risks of ceasing trade.
Creditors’ Voluntary Liquidation (CVL)
Given the legal obligations that may be outstanding in order to limit your liability in respect of company debt, a voluntary liquidation may be your best solution and is one of the most common processes. Appointment of a liquidator is sought by directors who convene a shareholders meeting. On appointment, the liquidator has a duty to realise assets, adjudicate creditors’ claims and investigate the affairs of the company. Although appointment of a liquidator incurs costs, an IP will typically look to be remunerated from the assets in the Company, subject to agreement with creditors.
The process also looks after employees’ claims in a relatively quick manner. The IP will assist employees so that claims such as arrears of wages, accrued holiday pay, redundancy pay and notice pay can be claimed from the Redundancy Payments Office (RPO). This also extends to directors in most cases who can also find themselves in line to receive compensatory payments from the RPO.
Compulsory Liquidation (WUC)
Where it is evidenced that the company cannot pay its debts, directors (or creditors) may petition the Court for a compulsory winding-up order. Although the cost is typically cheaper than CVL, the process to actually get a company into compulsory liquidation is significantly longer. This may not be appropriate where employees are chasing for their entitlements or assets need to be dealt with in a timely manner.
Once in compulsory liquidation, the case is administered by the Official Receiver. Depending on the type and level of the assets (or potential assets) comprised in the company, a licenced Insolvency Practitioner may be appointed as an independent Liquidator.
Administration is seen ultimately as a rescue procedure – to restructure or sell a business. However, in certain circumstances, Administration is also used to simply wind-up the company’s affairs.
Administration is a court process. A company can benefit from the moratorium it provides as soon as papers are filed with the court and hence, in some circumstances, can prove to be a very useful tool. However, costs are often higher than those in a Liquidation due to the process being court led and the additional reporting requirements which have to be met.
Administration also provides a platform on which a business can be packaged up and sold, known as a ‘pre-pack’. These are regularly scrutinised by the press and creditors alike, but can often provide a better outcome for the creditors as opposed to the alternatives.
Whichever exit route is correct for you, it is important to be taking the correct professional advice from a licenced insolvency practitioner. If you would like to discuss your situation further, please do not hesitate to contact one of the Business Recovery & Insolvency team on 01392 288555.
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