Introduction
Running a business is a challenging and rewarding experience, but it may sometimes be risky. Despite your best efforts, events beyond your control, market fluctuations, and economic downturns can push your company towards insolvency.
It’s a scary word, but it simply means your business cannot cover its debts and continue trading. As a responsible business owner, you should understand your options. There are different types of company insolvency in the UK, and understanding them can help you take the right steps towards managing your situation.
Bankruptcy
This type of insolvency is usually not applicable to businesses. However, if your business is a sole trader, partnership, or a limited liability partnership, then you, as the owner, can be forced into bankruptcy if the company is unable to pay its debts.
Under this process, a person is declared bankrupt by a court after proving that they are insolvent and unable to pay off their debts. In exchange for forfeiting most of their assets, the debtor is relieved from the obligation of paying off their debts.
Bankruptcy, while not a decision to be taken lightly, is a tool for those struggling with overwhelming debt. It’s important to note that bankruptcy is not a one-size-fits-all solution, and each individual case should be assessed properly before deciding if it’s the right option.
There are short and long-term implications from being declared bankrupt, so we always advise you to take appropriate legal advice first.
Company Voluntary Arrangement (CVA)
A CVA could be a viable solution if you are a business owner struggling with debt. It’s a legal agreement between a company and its creditors which allows you to continue trading while paying off the debts in a manageable way. This means you can avoid bankruptcy and rescue your company from financial ruin.
A CVA will typically last for three to five years; during this time, you will make regular payments to your creditors. While it may seem simple, a CVA is not a free ride. You will be required to make sacrifices and concessions to ensure the agreement succeeds.
However, with expert guidance and support, it can be a highly effective way to get your business back on track. If you believe a CVA could be the answer to your financial worries, don’t hesitate to seek professional advice.
Administration
Entering administration is a tough decision for any company in the UK, but it can be a necessary step towards getting back on track. This process involves appointing an external administrator to take control of the company’s affairs and decide on the best course of action for all stakeholders involved.
Entering administration doesn’t necessarily mean the end of the road for a business. In fact, it can offer a lifeline for struggling companies, giving them breathing space to restructure and recover. While it’s natural to feel apprehensive about entering administration, it can be a positive move that ultimately leads to a brighter future for all involved.
Receivership
Receivership and administration are often confused, but they have different purposes and aims. Receivership involves the appointment of a receiver to manage the assets of a failing business and sell them to repay the debt owed to secured creditors. If your creditors force you into receivership, there’s no option to try and salvage your company.
On the other hand, administration is a means of protecting a business from its creditors, while a rescue plan is devised by an administrator. The key difference between receivership and administration is that receivership aims to realise the maximum returns for secured creditors. In contrast, administration is focused on rescuing a business as a going concern.
Understanding the key differences between the two is essential, as knowing your options could help you make the best decision in a challenging situation.
Liquidation
Liquidation, sometimes called winding-up or dissolution, is a legal process that leads to selling a company’s assets to pay off debts. There are three main types of liquidation:
Creditors’ Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation (CVL) is a process where a company chooses to voluntarily close down its business. This is done through a formal legal procedure that involves company directors appointing a licensed insolvency practitioner to liquidate the company’s assets and distribute the proceeds to its creditors.
A CVL can be a difficult decision for any business owner to make. But, it can give them a chance to minimise further debts and avoid any legal issues that might arise from the ongoing operation of the business. In addition, a CVL allows the company to take control of the liquidation process rather than being forced into compulsory liquidation by its creditors.
Compulsory Liquidation
Compulsory or involuntary liquidation is a legal process in which a company is forced to sell its assets to pay off its debts. This process is typically initiated by a creditor or group of creditors who have not been able to collect the money owed to them by the company.
To begin the process, the creditor must obtain a court order forcing the company into liquidation. Once the order has been obtained, a liquidator is appointed to take control of the company’s assets and begin the process of selling them off.
This can be stressful and challenging for any company, but it is essential to remember that there are ways to minimise the impact of compulsory liquidation. By seeking professional advice and taking proactive steps to address any outstanding debts, companies can avoid the need for compulsory liquidation and consider less dramatic options.
Members’ Voluntary Liquidation (MVL)
Typically, an MVL is used when the owners of a company want to retire or close their solvent business in a controlled way. It’s a legal process allowing directors to wind up a company that can pay off all of its debts within a year while maximising shareholder returns. The MVL process requires the appointment of a licensed insolvency practitioner who will work with you to help close the company in an orderly fashion.
Unlike other liquidation procedures, an MVL can be relatively simple and straightforward. If you’re interested in learning more about how an MVL could help your company wrap up its affairs efficiently and cost-effectively, speak with an experienced legal firm who can walk you through the process and help you make an informed choice.
Summary
In conclusion, facing financial difficulties can be challenging and distressing for any business, but it’s essential not to ignore the warning signs. The sooner potential issues are identified and addressed, the better the chances of finding a suitable and effective solution. Crucially, you should seek professional advice at the earliest opportunity.
Birch Law can provide invaluable guidance, helping you understand the various options available, as explained in this article. Remember, reaching out for expert help is not a sign of defeat but a proactive step towards navigating your business through difficult times and working towards a more secure financial future. For more information, contact us today.
