Chris Bristow

When a company is insolvent its severe financial difficulties make it impossible to pay day-to-day liabilities essential to trading, such as wages and supplier payments, and this typically occurs after a prolonged period of poor cash availability.

Fortunately for limited companies in the UK, some solutions can avert full insolvency. Alternative funding options, such as asset refinancing or HMRC’s Time to Pay (TTP) scheme, can address financial decline and provide the support needed to recover.

What if a company has already entered insolvency, however – what are the options then?

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement restructures company debts so that they become more affordable for the business. CVAs help directors to trade their way out of financial difficulty and are suitable for companies deemed viable for the long term.

This is an official procedure, and repayments are negotiated by a licensed insolvency practitioner (IP) who must balance the creditors’ wish for maximum returns with affordability for the company for the term of the agreement.

Debts that remain unpaid at the end of the CVA may be written off, allowing the business to continue its recovery without the pressure of unmanageable debt. CVAs typically last for two to five years and allow directors to control their company even though it has entered insolvency.

Company administration

Company administration is a solution commonly used for insolvent larger companies that are experiencing persistent creditor pressure and may be at risk of being forcibly wound up through the courts.

The process provides legal protection from compulsory liquidation due to an eight-week moratorium that prevents court action by a creditor from continuing or being started. Briefly, the administrator assesses the company’s situation and decides its future.

Typical outcomes can include the CVA described above, a ‘pre-pack’ business sale known as pre-pack administration, and company liquidation. Pre-pack administration involves selling the business’s assets quickly to a third party or sometimes to the existing directors.

Company liquidation

Creditors’ Voluntary Liquidation (CVL) is the best route available for an insolvent company if it cannot be rescued. The process closes the company down permanently and repays creditors as far as funds allow.

Business assets are professionally valued and sold by the officeholder at a liquidation auction to provide as high a return as possible for unsecured creditors. Debts that remain unpaid are officially written off.

Creditors’ Voluntary Liquidation is a statutory procedure that ensures all the legal demands placed on an insolvent company are met and it can also relieve the pressure on directors at this point. A further benefit is that directors may be able to claim redundancy pay.

How to avert full insolvency

If directors act quickly it’s possible to head off insolvency with the right type of financing – funding that improves the cash flow shortages that are typically at the heart of a financial decline. Companies may be able to secure flexible finance using the value held within their sales ledger or other assets.

Tax arrears can be a particular problem for companies with poor cash flow as they and other debts can increase quickly if directors delay taking action. The good news is that HMRC operates a scheme that offers extra time to pay without penalty – sometimes up to six months or more.

Averting full insolvency relies on directors being aware of their company’s poor cash position, but it’s also vital to understand how their legal duties change when their company slips into insolvency.

The UK’s robust insolvency regime offers protection for those businesses that can be rescued and, crucially, a statutory route that safeguards creditor interests and closes down a company in an orderly manner.

Chris Bristow is a senior insolvency expert at Scotland Liquidators