What is Insolvency?
A very simple question, but one that can generate various definitions. Very simply, insolvency is defined as the inability to discharge your liabilities as and when they fall due for payment. A more detailed explanation is given in the following section.
How do I know if my business is insolvent?
For most people, knowledge of insolvency arises from knowing that you simply do not have funds available to meet your current liabilities, which is generally evidenced by some or all of the following:
- Creditors constantly chasing for payment
- Letters from debt collection agencies and solicitors chasing payment
- Pressure from HMRC for payment of outstanding liabilities
- Payments being returned by your bank because you’ve breached your funding limits
- CCJ’s, statutory demands, winding up petitions being served.
As mentioned above , the true test of insolvency is the ability to discharge your liabilities as and when they fall due for payment. The key phrase here is “as and when they fall due”. This generally refers to ongoing operational overheads – costs such as wages, salaries, rent, rates, light and heat and other general overheads, which most companies pay on a monthly basis – quarterly for rent.
Costs such as bank and finance loans are not usually included in this category, apart from agreed monthly repayments. If for example you have a bank loan of £50,000 repayable at the rate of £1,000 per month, then you would only include the £1,000 monthly payment when calculating “as and when they fall due”.
Effectively, a further test of insolvency is looking at the correlation of current assets against current liabilities, given that it is these assets and liabilities that you use on a daily trading basis.
If your current liabilities exceed your current assets, then technically your company is insolvent.
Your company may have significant fixed assets – i.e. a property, plant and machinery etc, but those are assets that would take time to realise or raise funds against, and as such are not likely to be readily available to allow you to use them to discharge your liabilities “as and when they fall due”.
We would be more than happy to discuss any issues or queries you may have in regard to further understanding the true financial position of your business, at no cost.
I think my company is insolvent – what help and advice is available?
There is an amazing array of information on the web from a plethora of organisations offering advice to directors of insolvent businesses. A significant proportion of that is simply marketing aimed at directors under pressure designed to persuade you to place your company with them. Here at CFS we take a very different approach. We are a completely independent firm, owned 100% by the partners and have no head office or central committee to report to. We have run our own business for well over thirty years and as such fully understand the problems of running a business. We will only offer advice that is the very best advice and most appropriate solution to your particular problems.
We take the time to understand your business
To enable us to offer insolvency advice, we first need to fully understand your business, the market in which you operate, the particular problems that you are facing and the reasons why those problem are now prevalent. We will arrange to meet with you, at no cost, for however long it takes to fully understand your position. Only then will we provide you with what we believe to be the most optimum solution to your problems.
Options for Directors – what happens next?
Clearly, by the very fact that you need to take advice, there is usually some element of financial/cash flow issue. Within the constrains of this article it is not possible to provide full details of all of the likely options available. However, it is likely that they will include one or more of the following options:
- A cost reduction exercise
- A refinancing package
- A restructuring of part or all of the business
- An informal arrangement with creditors
- A formal insolvency scheme – further details are given in the next section.
What happens to insolvent companies?
This will depend to some extent on the advice received by the directors and the directors’ actions based upon that advice.
The vast majority of insolvent companies will enter some type of formal insolvency scheme. The most common are as follows:
- Creditors’ Voluntary Liquidation
- Compulsory Liquidation
- Company Voluntary Arrangement.
The basic concept of Company Administration is to allow a company with financial difficulties sufficient time to try and trade out of those current difficulties. It is a formal court approved process and can only be carried out by a licenced insolvency practitioner.
The main reason a company goes into Administration is to seek formal protection from its creditors whilst the Administrator, usually with the assistance of the directors looks for a solution to those financial problems. This usually will focus on finding a buyer for the business, which can include the previous directors. In such cases, the Administration is likely to be deemed a prepack Administration – there are additional rules involved in such cases, details of which are given below.
Most Administrations are instigated by a secured lender, whose lending is secured against the company by a qualifying floating charge., allowing the lender to appoint Administrators, usually someone from their panel of licenced insolvency practitioners.
The directors can also consider appointing Administrators of their choosing, although if a secured lender holds a qualifying floating charge, the company will need to give 5 days’ notice of that appointment to the lender. The lender can either agree to that appointment or chose to appoint their own Administrator.
Once an Administrator has been appointed, they assume full control for all aspects of the business. The directors’ legal powers of control at that point cease. It is the Administrators legal duty to maximise realisations. This is usually through a sale of the business or part sale of the business. A growing number of Administration sales are now processed through the prepack route. Effectively this is where the directors have been discussing the prospect of buying the business back from an Administrator, where those discussions have taken place prior to the formal appointment of the Administrators – usually anything from 1 – 4 weeks prior. By completing a prepack purchase, the purchaser will only be acquiring the assets of the business. The liabilities will remain in the old company in Administration for the Administrator to deal with. The proceeds of sale, will firstly be used to discharge to costs of Administration and any remaining funds will then be used for distributions to the different classes of creditors.
Where a prepacked sale takes place, new rules have recently been brought in to try and ensure total transparency. Any such potential sale must now be approved by the prepack panel. This involves the Administrator advising the panel of the likely sale and the reasons for it and why it is in the interest of the creditors to do so. The panel have the option of approving the sale, seeking further clarification, or objecting to the sale. Key information required in the Administrators report will include:
- Details of marketing activity of the business
- Details of looking for alternate buyers for the business
- Details of discussions with major creditors
- Details of any other offers for the business
- A detailed explanation as to why the Administrator believes this to be in the best interests of the creditors.
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is probably the most common type of insolvency and is a fairly simple process. Once the decision has been taken that this is the most appropriate course of action, a meeting of directors is held to approve certain resolutions:
- That the company is insolvent
- That the company should be wound up
- That the company should cease to trade
- That meetings of the shareholders and creditors should be convened to pass resolutions to formally place the company into liquidation
- That the company engage the services of a licenced Insolvency practitioner.
After the initial meeting with the directors, we will have collated all of the necessary information to assist you with the CVL process. We will take responsibility for notifying all creditors, lenders, finance companies and HMRC. We will also notify your employees and assist them in dealing with claiming their employment entitlements.
Between the initial directors’ meeting and the formal shareholders’ and creditors’ meetings, the directors still remain responsible for the company’s actions. We will though assist you and provide advice where necessary.
The shareholders’ and creditors’ meetings are usually held within a period of up to 21 days after the initial directors’ meeting. These meetings are virtual meetings – held either by Skype or by creditors dialling in. However, a physical meeting will need to be held, if 10% or more of creditors request one.
The Liquidator is formally appointed at the shareholders’ meeting, with that appointment usually confirmed at the creditors’ meeting – the creditors’ meeting will usually be 30 minutes after the shareholders’ meeting. The creditors do have the option of appointing an alternate insolvency practitioner as liquidator, but to do so, will require 50% plus £1 of the creditors to vote in favour.
Once the liquidator’s appointment is confirmed, it is the liquidator’s responsibility to maximise the realisations from the company’s assets and to utilise those funds to first discharge the costs of the liquidation and secondly utilise any balance to paying a distribution to creditors.
The directors are entitled to offer to purchase the assets of the company from the liquidator. However, the liquidator can only agree a sale after the formal appointment, which is following the meeting of creditors.
Company Voluntary Arrangement
A company voluntary arrangement is different to other forms of insolvency in as much as the directors retain full control of the business once the business enters a CVA. The Insolvency practitioner is only there to ensure that the company complies with its obligations under the CVA proposal.
For a CVA to be implemented, certain criteria need to be met:
- The company must have a good underlying business
- The company must be capable of generating profits and cash once the pre CVA debt has been frozen
- The company will need the support of its key clients and suppliers going forward post CVA
- Ideally there should not be a winding up petition issued – if there is then discussions will need to be had with the petitioning creditor
- The company will need the support of its lenders
- The company, post CVA must be capable of funding itself within its established credit limits with suppliers and other lenders.
A CVA is effectively an agreement between the company and its creditors to freeze the existing debt whilst allowing the company to continue trading making contributions over a period of time to pay a pre agreed distribution to the creditors. The insolvency practitioner will need to write the CVA proposal to go to the creditors. This will include a summary of:
- The company’s history
- The company’s problems
- The reasons for those problems
- Steps to be taken to address the current issues
- Details of the proposed contributions into the scheme
- Details of the proposed distributions to the creditors and the likely timings of such distributions.
It is for the directors to decide what level of distribution to propose, based on input from the insolvency practitioner. However, bear in mind, that for any proposal to be approved, it will require 75% acceptance from your creditors. There is little point proposing repaying 3p in the pound over 5 years, when you know it will be rejected. Creditors can also seek modifications to your proposal – we can discuss this in further detail with you, if you think that a CVA is right for you.
The CVA will come to an end either on the following:
• A successful distribution to creditor inline with the original proposal
• A notification of failure issued by the insolvency practitioner – this though is a last resort.
The Insolvency Practitioner will only issue such a notice after extensively discussing with you the reasons for none compliance.
Once the CVA successfully comes to an end, the insolvency practitioner ceases to act, and the company continues under the full control of the directors.
Compulsory winding up
Compulsory liquidation is effectively the end of the road. The vast majority of companies entering compulsory liquidation do so, because one of its creditors has lost patience and has issued a winding up petition. If the petition is not opposed, it will be heard in court – usually the High Court and a winding up order will be made. The Official Receiver will then be appointed as liquidator.
Should you be unfortunate to receive a winding up petition, you must act upon it quickly if you wish to challenge it. It is vitally important, if you are to challenge any such petition that you seek either legal advice or advice from a licenced insolvency practitioner immediately. Here at CFS we have extensive knowledge and experience of assisting companies in getting petitions set aside.
What if I need insolvency advice or just a chat?
As mentioned earlier, here at CFS we understand the problems of running your own business. Our partners have all spent their entire careers in the business turnaround and insolvency profession, firstly working for several of the multinational practices before setting up our own practice. Our entire focus will be on looking for the very best solution to your problem. If that involves a process whereby we will not be financially rewarded, then so be it. Our goal is to give you the very best advice – by doing so you may even recommend us!
Covid 19 and Your Business
We couldn’t finish this briefing paper without reference to the pandemic, given the impact it has had on everyone’s lives and the impact that it is yet to have.
One of the key issues that we are now starting to see is the attitude of HM Government and banks to businesses that took loans under the Government support scheme initiatives, whether that be bounce back loans or CBILS loans.
We suspect at some point in the not too distant future, guidelines will be issued to insolvency practitioners appointed to insolvent companies, to look carefully at any such borrowings taken on by that company. It is extremely important, that you ensure that you have documentary evidence to support the decision you took to apply for any such loan. Again, if you have any doubts about this, then please just contact us for an informal chat.