When a company is facing financial difficulties, directors may feel that liquidation is their only option. However, there are several alternatives to company liquidation that directors can consider before making the decision to wind up their company. These alternatives offer the opportunity to save the company, preserve jobs and ensure that creditors are paid as much as possible.
Below are 5 alternatives to company liquidation available to directors in the UK, including Company Voluntary Arrangements, Administration, Company Restructuring, Debt Restructuring, and Informal Arrangements. We will also examine the benefits and drawbacks of each option, so that directors can make an informed decision about which solution is best for their company.
Company Voluntary Arrangement (CVA)
A CVA is a legal agreement between a company and its creditors to pay off its debts over a set period, usually three to five years. A CVA allows the company to continue trading while making payments to its creditors.
Benefits of a CVA
- Allows the company to continue trading while addressing its financial difficulties.
- Provides breathing space from creditors’ legal action and enforcement.
- Allows the company to negotiate with creditors and agree on a payment plan that is manageable.
- Can result in a reduction of debt and more favorable repayment terms.
- Provides a chance for the company to restructure and improve its operations.
Drawbacks of a CVA
- It can be difficult to obtain the required creditor approval for a CVA proposal.
- The company may need to make significant changes to its operations and may face resistance from stakeholders.
- The company’s credit rating may be negatively affected.
- The CVA may fail if the company is unable to meet the agreed-upon payment plan.
- The CVA may not be suitable for all companies, depending on their financial situation and the level of debt owed.
Administration
Administration is a process that allows a company to be restructured while under the protection of the court. An administrator is appointed to manage the company’s affairs, and a moratorium is put in place to prevent creditors from taking legal action against the company. The aim of administration is to save the company and its business.
Benefits of an Administration
- Provides a moratorium on creditor actions against the company, allowing time for restructuring and negotiation with creditors.
- Can result in the rescue of the company as a going concern.
- The company’s management is replaced by an administrator who has the power to make decisions on behalf of the company, which can help to facilitate negotiations with creditors.
- The administrator can sell parts or all of the company’s business to a buyer, which can help to maximise the value of the company’s assets and benefit creditors.
- It can be a more flexible option than liquidation, as it allows for the possibility of the company continuing to trade.
Drawbacks of an Administration:
- The cost of hiring an administrator can be high and will be taken from the company’s assets.
- The outcome may not be favorable for all creditors and shareholders, as some may not receive full repayment or may lose their investment.
- The process can be lengthy, which can be a drain on resources and may result in the loss of employees and customers.
- It may not be suitable for all companies, as some may be too financially distressed for administration to be a viable option.
Company Restructuring
Company restructuring involves changing the structure of the company, such as selling off non-core assets, changing the management structure, or consolidating departments. Restructuring can help to reduce costs and increase efficiency, improving the company’s financial position.
Benefits of Company Restructuring
- May result in a more efficient and profitable business model.
- Helps to reduce debt and improve cash flow.
- Results in a more focused and streamlined organization.
- The process is designed to address underlying issues that contributed to the company’s financial difficulties.
- Can improve the company’s overall financial stability and position it for long-term success.
Drawbacks of Company Restructuring
- Restructuring is a complex and difficult process, requiring significant time and resources.
- Can be disruptive to the company’s operations and may result in job losses.
- Requires significant changes to the company’s operations and may face resistance from stakeholders.
- May not be sufficient to address all of the company’s financial difficulties.
- The process can be expensive and may not result in immediate financial benefits.
Debt Restructuring
Companies may seek to modify their existing debt obligations in order to improve their financial position and avoid insolvency. This can involve renegotiating the terms of existing debt with creditors, such as extending the repayment term or reducing the interest rate, or converting debt to equity. Debt restructuring can also involve obtaining new debt with more favorable terms to pay off existing debt.
Benefits of Debt Restructuring
- May result in lower interest rates, reducing the cost of borrowing.
- Typically results in more favorable repayment terms, making debt more manageable.
- Can help to avoid default and improve the company’s credit rating.
- Provides breathing space for the company to reorganize and turn its financial situation around.
- Helps to preserve relationships with creditors and maintain access to credit.
Drawbacks of Debt Restructuring
- Companies may have to give up some control or ownership to creditors.
- Generally result in a longer repayment period, increasing the overall cost of the debt.
- Not feasible if the company is in severe financial distress.
- Requires companies to make significant changes to its operations and may face resistance from stakeholders.
- May negatively impact the company’s credit rating in the short term.
Informal Arrangements
Informal arrangements involve negotiating with creditors outside of a formal legal process. This can include negotiating payment plans or debt write-offs with individual creditors. Informal arrangements are not legally binding but can be an effective way of managing debts in the short term.
Benefits of Informal Arrangements
- A flexible and low-cost option for companies that cannot afford formal insolvency proceedings.
- Can improve relationships with creditors, as the company is taking proactive steps to address its financial difficulties.
- Result in more favorable repayment terms, making debt more manageable.
- Provides breathing space for the company to reorganize and turn its financial situation around.
- Helps to avoid formal insolvency proceedings, which can have a negative impact on the company’s reputation.
Cons of Informal Arrangements
- Informal arrangements are not legally binding, meaning creditors can still pursue legal action against the company.
- Creditors may not agree to the arrangement, leaving the company in a vulnerable position.
- The company may not be able to negotiate favorable terms, resulting in a less effective arrangement.
- The arrangement may not address all of the company’s financial difficulties.
- The company may not have the necessary expertise to negotiate effectively with creditors.
An insolvency practitioner can help to identify the most appropriate solution for the company’s financial situation, which is why it’s recommended that Directors seek professional advice before deciding on the best course of action for their company. By considering these alternatives to company liquidation, directors can potentially avoid the negative consequences of a formal liquidation process and may be able to save the business.
