Alternatives to Liquidation
If your business is struggling with unaffordable debt, you may think closure is the only way out. Thankfully, there are actually many alternatives to liquidation.
Early action – and proper guidance – can help your company deal with debts while continuing to trade as normal.
In this guide, we’ll be exploring the different options available, when they’re most appropriate, and how you can get help.
Contents
Company Voluntary Arrangement (CVA)
Company Voluntary Arrangements are one of the most popular alternatives to company liquidation. They function as repayment plans, allowing businesses to stay open while they gradually deal with their debts.
CVAs offer many advantages to struggling businesses:
- Freezes interest and charges on company debt
- Protects businesses from closure
- Significantly reduces monthly overheads
- Typically last for around 3-5 years
- Some debts can be written off
To enter into a Company Voluntary Arrangement, you’ll need the backing of your creditors. Success depends on the state of the company and the strength of the CVA proposal.
Creditors will need to be convinced that the CVA offers an agreeable monthly repayment and that it will provide them with better long-term returns than a liquidation. They’ll also need to be assured your business is stable enough to keep up with the repayments going forward. Our team will construct a proposal that is workable for you and attractive to creditors.
Administration
Administration is an alternative to liquidation that provides the opportunity for struggling businesses to get back on their feet. Control of the company is handed over to an administrator, who will look to achieve one of the following 3 outcomes:
- Save the business as a going concern
- Achieve a better result for creditors than a liquidation
- Realise assets to make a return to secured or preferential creditors
The administrator will look to save the business before defaulting to one of the other options. While it doesn’t offer the same guarantees as a CVA, administration does offer many benefits to struggling companies:
- Protects company from closure
- Stops debt collection efforts
- Gives much-needed time to regroup
Unlike other recovery solutions, you don’t need the backing of your creditors to enter into administration. This means a lot of companies who cannot get the support needed for a CVA enter into administration until they can get the votes they need.
Pre-Pack Administration
This is a special kind of administration where things are “pre-packed” before the process begins. Unlike in regular administration, the buyer of the company is decided prior to the administration process. Once the administrator is appointed, the sale takes place immediately.
Pre-pack administration is sometimes used to “phoenix” a company. This is where the company’s existing directors arrange to buy the company’s assets prior to the administration, allowing them to move these into a new debt-free business.
While this does sound attractive, there are a few obligations to keep in mind.
Directors have been known to use pre-pack administration to effectively ditch their debts, so regulation has been set into place by the government. Failing to meet these standards can result in misfeasance charges, potentially disqualifying you from future directorship or making you personally liable for company debts.
If you’re interested in pre-pack administration, we can ensure the process is handled properly, protecting your legal and financial interests.
Is Company Dissolution a Valid Alternative to Liquidation?
Sometimes directors seek to have their company closed via company dissolution rather than company liquidation.
This is where the company director has the business removed from the Companies House register via a voluntary strike-off. It doesn’t require the assistance of a liquidator, meaning it avoids the expense of professional fees.
However, company dissolution is not always a viable alternative to liquidation.
If your business is insolvent, company dissolution is not appropriate. The strike-off process simply removes the business from the Companies House register, and fails to properly deal with its debts. This means that insolvent directors – who have a duty to their creditors – may find themselves facing misfeasance charges.
Directors found liable for misfeasance can be made personally liable for company debts and disqualified from future directorship.
Company dissolution is often not appropriate for solvent companies either. Businesses with assets totalling £25,000 or more should pursue a Members’ Voluntary Liquidation instead. Failing to do so will result in returns being subject to full Income Tax rather than Capital Gains Tax. Although an MVL attracts professional fees, the tax savings offered by the process outweigh any expense.
How Do I Know Which Solution Is Right for Me?
Although it’s clear there are many alternatives to liquidation, deciding which one is right for you can be tricky.
Each insolvency solution is catered to deal with specific circumstances, so the answer to this question varies on a case-by-case basis.
While handling the closure of a company can be stressful, it’s important not to rush into anything. Making the wrong choice can be very costly, so you need to ensure you seek proper guidance before making any decisions.
Speak to an Expert
If you’re looking to close or rescue a company, speak to one of our insolvency experts today.
Our team can lead you to the best possible solution for you, ensuring your legal and financial interests are protected.
Get in touch to book a free consultation today.
