What are the Limited Company Debt Options?

COMPANY DEBT ANALYSER

If your business is in a difficult financial situation, there are a few options to choose from, each with advantages and disadvantages. This section aims to describe and outline each of the main available options, together with their pros and cons to help you decide what the best way forward is for you and your business, such as:

  • CVA – Company Voluntary Arrangement
  • Voluntary Liquidation (CVL)
  • Business Turnaround
  • Pre-pack Administration
  • Business Turnaround

Before considering pursuing the more ‘final’ options available such as winding up your business, all possible options to rescue your business should be considered.

While you may have some cost- cutting ideas in mind and other logistical corners you can cut to raise capital, consulting a professional business turnaround expert is a good place to start.

Business turnaround is the process where a turnaround practitioner (who can also be an insolvency practitioner) works with business owners to audit all business operations and see where things can be improved. This is so that areas of the business which are not running at full efficiency can be found and fixed, contributing to the recovery of a company.

Initially, the practitioner will spend time to get to know the company, its objectives and how it goes about reaching them. They will speak to employees, meet with directors and get an idea of the day to day running of the business. They will then arrange a meeting with creditors to show them that steps are being taken to improve the business and begin their investigation into where the problems lie within the business. All issues are identified, prioritised and analysed to ascertain the best way to move forward to begin the actual business turnaround process.

Speak to a turnaround practitioner at The UK Company Insolvency Helpline today. 

An advisor who specialises in helping ailing companies solve their problems and get back on their feet,
a simple analogy of this would be to describe a turnaround practitioner as a company doctor.

Voluntary liquidation – CVL  – A common method of dealing with company debt

Voluntary liquidation is the dissolving of all of a business’s assets to pay employees to satisfy redundancy laws, creditors and shareholders.It is usually a last resort, and is the last option that a business may have as a result of no interest from buyers or takeovers. There are likely to be expenses involved, which do not make the best returns for business owners or creditors.

Advantages of Voluntary Liquidation

  • Once a company has been liquidated, all outstanding debt must be written off by creditors, leaving a clean slate for directors to start again afresh.
  • Directors and investors have the opportunity to focus efforts and funding on growing a new business.
  •  The directors control the closure process and can choose their liquidator.

Disadvantages of Voluntary Liquidation

  • Creditors may end up not getting what they are owed leading to bad feelings and an impact on their own business.
  • The closure of a company will result in employee redundancy, with no guarantee that they will receive their full redundancy sum.
  • Company directors cannot continue to trade once insolvent, and if caught doing so will be disqualified.

Types of Liquidation

Creditors Voluntary Liquidation

When a company cannot pay its debts, they may go into a CVL and the shareholders and directors decide to place the company into liquidation because it is insolvent. This involves the appointment of an Insolvency Practitioner acting as a liquidator, whose duty is to ascertain and collect the assets of the company and distribute them amongst creditors. This process is used when a company is insolvent and cannot pay its debts, and the business is no longer viable and directors are not prepared to continue running and trading the company. investigation work that is required.

Compulsory Liquidation

Otherwise known as compulsory winding up, compulsory liquidation is carried out under the order of the court, usually as a result of petitions by creditors or shareholders who have given up trying to recover money from the insolvent business.

The insolvent business is referred to the official receiver by the court who becomes the liquidator. If the company assets are enough to cover the administrative costs, the official receiver will arrange a meeting with the creditors to appoint a different liquidator if required. The official receiver is responsible for investigating the directors and any other investigation work that is required. The Official Receiver is amcivil servant in The Insolvency Service and an officer of the court. He or she will be notified by the court of the bankruptcy or winding-up order. They will then be responsible through his staff for administering the initial stage. This stage includes collecting and protecting any assets and investigating the causes of the bankruptcy or winding up.

Members Voluntary Liquidation

This is the process where all the company shareholders decide to liquidate a company, providing that there are sufficient assets to settle debts before doing so.

After the decision has been finalised, it is recommended to seek to advice from a licensed Insolvency Practitioner. This is to ensure that standard practice is carried out and all documents are correctly filled in and processed. If the liquidator decides that the company will not be able to pay off all debts in full within the agreed period, a meeting with the creditors is called and the process can be converted into a Creditors Voluntary Liquidation (CVL).

Company Voluntary Arrangement ( CVA)

A CVA is a deal between creditors and the insolvent company, that places a legal framework around the company to stop creditors attacking it.

This is known as a moratorium. It paves the way for a struggling business to repay all or part of its debts out of future profits, over a time which has been previously agreed. Part of UK law since 1985, it is one of the government’s preferred rescue solutions. The CVA requires 75% of creditors to approve the process, and if it is approved the remaining creditors are obligated to be a part of the agreement.

Company Voluntary Arrangement ( CVA) – The CVA Process

  1. Company recognises that there is a problem.
  2. Company Directors consult business rescue specialists to ascertain whether a CVA is the best way forward.
  3. A restructuring strategy is prepared.
  4. Discussions are had with key stakeholders such as suppliers, funders, creditors and other shareholders.
  5. 14-21 Days later a creditors and shareholders meeting is carried out.
  6. The final version of the CVA and the nominee’s report are filed at court, and copies are sent to Shareholders and Creditors ahead of a meeting.
  7. The nominee reviews the proposal and gives amendments and / or approval.
  8. Business rescue specialists will prepare forecasts, write the CVA proposal and help with appointing an insolvency practitioner who will act as the nominee.
  9. Over 75% of the creditors and 50% of Shareholders must accept the CVA and agree for the process to continue.
  10. The final version of the CVA and the nominee’s report are filed at court, and copies are sent to Shareholders and Creditors ahead of a meeting.
  11. The CVA is implemented.
  12. Monthly payments are made according to the proposal.
  13. Company is debt free on the condition that they have compiled with the terms as set out at the beginning
    of the process.

Advantages of a CVA

  • It is a private agreement, so customers and suppliers you don’t owe money to do not need to know of the situation.
  • Once agreed upon, repayments to creditors will be reduced to an affordable amount.
  • At the end of the agreements, any outstanding debt is written off.
  • No upfront payments – practitioner fees are taken from the monthly payments.
  • The company can continue to trade.

Disadvantages of a CVA

  • Creditors will receive less than they are owed, but their returns are more than if the business was liquidated.
  • The CVA is recorded against the business’s credit file, making it more difficult to borrow
    in the future.
  • The company may be wound up by the practitioner if payments are not honoured and maintained.

Pre-pack administration  – A popular method of dealing with company debt

Pre-pack administration (or a pre-packaged sale) is the name given to the process where insolvent businesses assets are sold off to new owners whilst the business is still trading.

The process is handled by an insolvency practitioner and the purchaser could be a competitor, someone new
to the company or even the existing management.

Advantages of Pre-Pack Administration

  • Although creditors may not receive everything they are owed, a Pre-Pack Administration will still give them more than if the company was closed.
  • Customers and suppliers will still have an opportunity to trade with the new business, which would be impossible if the business was liquidated.
  • A new business can begin trading in place of the old one without the legacy debts.
  • Existing employees can be retained, unlike in the case of liquidation where employees will be made redundant.

Disadvantages of Pre-Pack Administration

  •  Up-front investment may be required to buy the assets of the old business.
  • Under European law all existing employees must be transferred to the new business under the same terms and conditions. As such, Pre-Pack Administration cannot be used to avoid a redundancy process.
  • Although some debt will be paid, creditors will still suffer losses.

A Fresh Start – A common option for limited companies with debts

A fresh start is when a company finds it desirable to completely end things, and start again fresh due to their business being insolvent and past the point of recovery.

Together with a business rescue company, the process can be relatively simple and can be completed in a matter of weeks. With the help of a business debt company, the process will usually include:

  • The formation of a new company.
  • Negotiations with your bank.
  • Asset protection.
  • Safeguarding of personal guarantees.
  • Legal Protection every step of the way.

In order to restrict abuse of the fresh start method, there is a restriction on the re-use of the same or similar business name until five years after liquidation. The only way to re-use an existing or old company name is to pay money for the privilege.

If you are setting up a new company after a pre-pack or fresh start, consider invoice factoring to support the cash flow of the new business. Seek advice: The gold standard of any financial difficulties, make sure that you are aware of all of your options. If going into liquidation, ensure that you are getting the right price for your assets. Get a third party involved to evaluate them

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