Formal insolvency tools to maximise recoveries
Insolvency is often maligned as being “the end of the road” for a company. And while this is the case for many liquidations, the formal proceeding framework can provide valuable relief and facilitate the restructuring and emergence of a viable business.
Administrations Orders offer companies with a viable business but which are otherwise financially distressed a breathing space during which plans can be formulated to restructure or refinance, thereby preserving value and protecting employment.
Using the “out of court” route an administration order can be quickly and efficiently obtained, providing an immediate moratorium against creditor action.
An Administrator who must be a Licenced Insolvency Practitioner and is independent from management or shareholders is appointed to take control of the company (in the shoes of the directors) and to formulate proposals which are subsequently put to creditors for approval either to:
- rescue the company as a going concern, or if this can’t be achieved
- achieve a better outcome for creditors as a whole than would be achieved through a liquidation (usually this would be through a period of ongoing trading and a sale of all or part of the business as a going concern); or if this can’t be achieved
- realise assets for the benefit of secured and preferential creditors
A Pre-Pack is simply the name given to the process whereby the sale of a company’s business or assets is agreed prior to the commencement of a formal insolvency process but the sale is only completed after the appointment of the insolvency office holder (“the IP”).
The period between appointment of the IP and completion of the transaction is usually very short (sometimes only a matter of hours) and without further marketing of the business.
Notwithstanding the IP’s duties remains to ensure the best result for creditors as a whole and accordingly when appointed he, or she, will want to ensure that proper value has been obtained in the circumstances. This may be achieved by a period of contingency planning and pre-appointment marketing by the company which the IP in waiting will scrutinise. SIP 16 introduced certain requirements around pre-packs to ensure that creditors have information about what is happening with the business.
Pre-pack’s are most suitable where value in the business is primarily attributable to assets which are highly susceptible to value destruction following the commencement of insolvency proceedings.
Company Voluntary Arrangements (“CVA”)
A CVA can provide an opportunity for a company to restructure or compromise its liabilities to unsecured creditors and continue as a going concern, preserving employment and stakeholder value.
It is a potential alternative to other more disruptive forms of formal insolvency.
Often, but not always, it will be used as an exit route from Administration.
A pre-requisite for a successful CVA is an open and honest dialogue with stakeholders and a clear articulation of the alternatives in the event that a solution cannot be agreed.
The process is overseen by an Insolvency Practitioner (“IP”), who becomes the Supervisor once the proposals are approved by meetings of creditors and members. Once approved it is binding on all unsecured creditors.
Creditors Voluntary Liquidations (“CVL”)
In certain circumstances there may no longer be a viable ongoing business and the Company’s life needs to be brought to an end.
It is important to deal with this properly to avoid personal liability issues for directors.
Where the company is insolvent, defined as being either inability to meet its liabilities as they fall due or where its debts (including contingent liabilities)are greater than the realisable value of its assets, a creditors’ voluntary liquidation may be the most appropriate process.
The process is commenced by a resolution of the board recommending liquidation and the convening of meetings of members and creditors.