Is a company rescue an option?

If you’ve reached the point of wondering whether or not your company can be saved, then you don’t need anyone to tell you that things are serious. You are probably receiving threatening letters from HMRC, unable to sleep properly and feeling more and more stressed.

In this frame of mind, you’re not thinking straight and you’d be well advised to contact an Insolvency Practitioner (IP) immediately. They know the key questions to ask in order to advise you as to whether the company can be saved. They also have expert and practical knowledge of all the available options, so they can match your requirements to a pragmatic solution. They help to rescue companies all the time, so what may feel like overwhelming problems to you may actually prove relatively simple for them to solve.

The sooner you take action, the more options you’ll have available. But if you let things drift in the hope that they will improve, more and more options will close. So reaching out early on for help can make a dramatic difference.

What can I do to save the company?

If you think that your company is on the brink of insolvency, or may actually be insolvent, you have an opportunity to address the issues and either restore solvency, or restructure the debt so that the company can hopefully trade its way out of its current difficulties.

Many profitable businesses with full order books go to the wall because they expand too rapidly and run out of working capital. If you can restore cashflow by bringing in an investor, or one of a number of other methods, then this is also a way to carry on trading. But if extra capital or borrowing is not a possibility, you need to consider the options described here.

Company Voluntary Arrangement (CVA)

Individuals in financial difficulties can come to an arrangement with their creditors through an Individual Voluntary Arrangement (IVA). The same facility is available for companies, albeit in a slightly more complex form, as companies tend to have more complicated financial affairs. It’s known as a CVA.

Is my company eligible?

Not all companies are eligible for this, and while we’ll take a general look at which companies can use the CVA, you’ll need to talk to an Insolvency Practitioner (IP) to get a view as to whether your company can use this vehicle. The IP will also need to set it up.
All the directors need to agree that the company should seek a CVA.

CVA Preparatory work

Essentially, the IP will be seeking to rescue the company by rescheduling its payments to its creditors and formalising this through the CVA. So first of all the IP will assess the company’s position, then they will produce the CVA proposal for the creditors. As director, you’ll need to read this draft proposal and revise it if necessary.

The IP will want to know that the CVA will result in a workable schedule of payments. If you can’t meet the proposed payments, the IP will suggest one of the other insolvency schemes such as the Creditors’ Voluntary Arrangement.

CVA proposal sent to creditors

Once the directors are happy with the draft CVA, it’s first sent to the Court and entered there as a legal document. Signed copies are then forwarded to the creditors, giving notice of a creditors’ meeting which must be at least three weeks ahead.

Creditors’ and Shareholders’ meetings

The creditors don’t have to attend in person, so they can send in forms rejecting or accepting the CVA proposal or they sometimes send a substitute to attend in their place. Those who do attend will hear a presentation from the IP on the CVA proposal and they’ll have an opportunity to ask questions and request that the proposal is amended or revised. The company’s shareholders will also meet to consider the proposal.

Votes on whether to approve the CVA

For the CVA proposal to be successful, creditors who own at least 75% of your company’s debt must agree to it. This rule also applies to any of the amendments that may be suggested during the meeting. Good communication with the creditors before the meeting will greatly increase the chances of the CVA being accepted. If enough creditors agree, then the CVA is approved. The shareholders also meet; 50% of the shareholders must vote for the CVA for it to be approved.

Once these two hurdles have been cleared, the CVA is approved and the company is solvent again. All legal action being taken against the company ceases and remains at “stop” unless your company defaults on the CVA.

The IP issues a report on the meetings, detailing who voted for and against the proposal. The IP sends this to the Court and all of the company’s creditors within 4 days of the meeting.

The Payment Plan

Your company can carry on trading but, obviously, needs to stick to its payment plan. You don’t pay the creditors directly; you make just one monthly payment to a trust account. The IP administering the plan pays the individual creditors. This prevents any disputes or confusion as to whether the payment plan has been adhered to.

If you don’t stick to the plan, any creditor (not just the ones who agreed to the plan) can apply to wind up the company. However, if you are sticking to the plan, you are protected from hostile creditor action. So it’s important to set up a plan that is realistic in both its monthly payments and its schedule. Defaulting on the CVA will almost definitely mean that the company is wound up through compulsory liquidation.

Advantages of the CVA

If you act early enough to get a CVA, it can save your company. It is far less expensive than putting the company into administration and you remain in control of the business side of things. It also has the great advantage that as soon as you contact the IP to ask them to set up the arrangement, all pressure from creditors such as HMRC, ceases. This alone can give you the breathing space you need to calm down and see things more clearly and positively.

If you do get a winding-up petition, provided that the CVA is set up within 7 days, you can apply through the IP to get the winding-up petition set aside.

Another key advantage of the CVA process is that it is discreet. It doesn’t involve advertising in The Gazette (the government business paper), as some insolvency arrangements do. In terms of saving the company, this is a major plus because suppliers, customers and the public don’t need to be told of the company’s problems unless they are also creditors. This prevents the vicious spiral in which the company’s troubles produce a lack of confidence which, in turn, causes further problems for the business.

However, it’s not always possible to get all the directors to agree to apply for the CVA and you may not be able to get the owners of 75% of the debt to agree to the payment plan. If this is the case, don’t despair. Let’s look at the next option.

Pre-pack Administration

This is the next best option if you can’t set up a CVA for any reason. It will involve selling the business and putting the company into administration. The whole purpose here is to keep the company trading normally, so that it retains its value. Of course, the company will need to be professionally valued to establish the price at which it can be sold.

This option allows the directors of the company to buy its assets before the business is sold, then set up a new company which continues to trade and pay its employees in the normal way. Again, this must be carried out by a properly authorised IP who can ensure that the law has been observed. The IP protects the creditors’ interests and therefore needs to be able to prove that the business could not have carried on, as it was insolvent and that administration is the best option for the creditors.

Anyone buying the company’s assets (such as the directors of the existing company) must pay the fair market price for the assets. This money is paid out to the creditors, so the IP is there to make sure that no assets are sold at a reduced price to insiders.

Pre-pack administration, if it is properly managed, can take place so seamlessly that customers and suppliers don’t notice anything different about the business.

What the Administrator does

Once the administrator is appointed, they inform the creditors that the company is in administration and tell them how the sale of the assets and business is going to be arranged and managed. After this, they need to provide detailed information as to how the administration will proceed and this needs to reach the creditors within 8 weeks of the administrator’s appointment. The government’s Insolvency Service has recently made clear that it expects the administrator to give the creditors the reasons behind the decision to put the company into administration.

No later than 10 weeks after the administrator’s appointment, if it looks as though some cash can be paid out to the unsecured creditors, they are called to a meeting. Normally, the administration period has to be concluded after a year.

Pre-pack administration and employees

Employees are protected by TUPE (Transfer of Undertakings Protection of Employment) when a business changes hands. This will apply if you opt for Pre-pack administration.

There are various regulations as to how staff will be paid if there is not enough money in the existing company to pay their wages, holiday pay, and so on. The staff can obtain the pay from the National Insurance fund but any payments over the statutory minimum will be inherited by the new company as liabilities.

You can only change the employment contracts of your staff as part of the sale, if the staff agree. Furthermore, any changes you make must be because they will help the business to be sold as a going concern and therefore protect jobs. In any case, all staff need to receive updated employment terms and conditions from the directors once the new company is set up.

Pension rights are a sensitive subject in these arrangements. Employee’s pension rights are only protected until the day the business is sold. The new company doesn’t have to continue the existing pensions regime.

CVA or Pre-pack administration?

Both arrangements have their attractions but a CVA gives the director the ability to remain in charge of the existing company and the business. It’s a less expensive process than administration and is less disruptive for employees. On the other hand, administration can allow a “phoenix” company to rise from the ashes of the previous business and make a fresh start.

The best path for your company will depend on a host of factors that are specific to the company and the business. If you talk to an IP early on, you will maximise the chances of achieving the option most likely to rescue your company.