A company experiencing financial difficulties is not necessarily a cause for alarm, as it is part of the natural cycle of a business generally. If, however, the directors are concerned about the financial position of their company, they should seek professional advice on the next steps to improve the company’s financial position and to protect themselves from any actions being taken against them personally for breach of their director’s duties. It is, therefore, useful for directors to have a general understanding of the options and procedures that are available to a company that is experiencing significant financial difficulties.
Below is a summary of the key formal insolvency and recovery procedures that are available for companies. As an overarching principle, it is important to note that winding up or liquidating a company is not necessarily the appropriate action, as this will be dependent upon the applicable circumstances.
Winding-up or liquidation
Compulsory liquidation
This occurs where the Court places a company into liquidation following a petition by a relevant party (as discussed in more detail below), and a liquidator being appointed to realise and distribute the company’s assets for the benefit of the company’s creditors.
Compulsory liquidation can only occur where the Court is satisfied that the company in question is unable to pay its debts, or it is fair for the company to be wound up.
Additionally, only certain parties are able to petition the court for a company to be wound up. These parties include creditors of the company, the directors of the company and the Secretary of State (amongst others).
Voluntary liquidation
This occurs where the Court places a company into liquidation following a petition by the company’s shareholders. There are two forms of voluntary liquidation that can apply, depending upon whether the directors of the company are willing to swear to the company’s solvency (i.e. that the company can pay its debts in full within 12 months of the winding up being started).
If the directors are willing to swear to the company’s solvency, then the procedure will be called a “members’ voluntary liquidation”. If they are not willing to swear to the company’s solvency because the company is unable to pay its debts, then the process will be called a “creditors’ voluntary liquidation”. It is important to distinguish these as a member’s voluntary liquidation is applicable for legally solvent companies, and the creditors’ voluntary liquidation is applicable for legally insolvent companies.
The impact of a voluntary liquidation is that the business of the company ceases and a liquidator is appointed to realise and distribute the company’s assets for the benefit of the company’s creditors.
Rescuing a company
Administration
Administration is the procedure by which an administrator is appointed to a company in order to pursue a number of goals:
1. Rescue the company as a going concern.
2. Achieve a better result for creditors than would have been likely in a winding up.
3. Realise property to make distribution to one or more secured or preferential creditors.
The effect of administration is essentially to provide the company with a period of time to be rescued or reorganised, with the administrator being charged with taking over the running of the company’s business in order to achieve one of the above goals.
Company Voluntary Arrangement (CVA)
This is a formal agreement between a company and its creditors in relation to its debts. Such an agreement may involve, for example, the restructure of the debts that are owed, although there are specific rules about the extent to which this can occur.
A majority of creditors of a company will need to approve the CVA. If this majority is obtained, all creditors (save for disagreeing secured and preferential creditors) are bound by its terms, and the company’s assets come under the control of a supervisor.
The above is not an exhaustive list of the options available for a company in financial difficulties, but rather provides a snapshot of some of the different possibilities. For a further assessment of what options are available for a company, please contact Edward Beedham in our Corporate department. You can also email your query to edward.beedham@herrington-carmichael.com or call 01276 854 666.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.
