Guidance on Navigating Insolvency - The most Frequent Procedures

When a business begins to falter one of the key factors in turning a business round is recognising that a business is weakening and tackling the situation before it becomes critical and impossible to turn around. Recognising that serious financial difficulties appear to be leading the business into insolvency at an early stage enables the business owners to direct the business along a route to recovery and prevent the business collapsing or going broke.

There are various options when insolvency is threatening, GIambrone and Partners’ commercial lawyers suggest before entering a formal insolvency regime is to attempt informal solutions, such as direct negotiations with the creditors to arrange extended payment terms, taking cost cutting measures such as selling assets that are not essential to the business and streamlining staff in accordance with legal procedure. Also, if financially viable, seeking additional funding or investment to stabilise the firm. Our lawyers can act on behalf of business owners in these discussions.

In the event of the informal approaches failing, formal insolvency procedures may be necessary.

Olu Ajasa, a partner, commented “There is a choice of procedures when a company is facing economic hardship. Both a Company Voluntary Arrangement and Administration provides the opportunity to restructure the business to enable it to meet ongoing financial obligations once more and trade whilst the procedures are taking place. In the case of Administration a few weeks are permitted to develop proposals to put before the creditors outlining the financial status of the business, the actions to be taken during administration and the potential impact for the creditors.” Olu further commented “similarly, with regard to a CVA, it also gives the business a chance to recover. The creditors vote on the proposal and the business remains in the control of the directors. However, whilst administration provides greater legal protection as creditors are prevented from taking legal action, a CVA is less costly. Also, with administration the owners do lose control of their business, whilst it maybe regained, expert legal advice is vital before any decisions are taken.”

The Principal Insolvency Procedures Explained:

Administration

• Administrators aim to rescue the business and enable it to continue trading if possible
• It usually lasts for at least 12 months but can be extended by the courts. 
• The directors lose operational control during the course of administration and face scrutiny as to how the business came to be in financial difficulties. 
• The business can continue trading thereby saving jobs
• Administrators may sell all or part of the business
• If the business cannot continue the assets are sold to pay the creditors

There may have been events that were outside the control of the directors that created a situation that impacted on the way the business was able to trade, as in the case of Typhoo Tea where there were external factors that impacted on the capability of the firm to function, in that trespassers broke into the former factory in Moreton and caused considerable damage. Also, a fire which broke out at the site added to the damage. The two incidents exacerbated the firm’s declining financial position and led it into administration. Typhoo has now been bought by the vape and battery maker Supreme.

Company Voluntary Arrangement (“CVA”)

A CVA gives a potentially viable business the chance to recover. It is a formal procedure and lasts between three or five years. The proposal has to be accepted by at least 75% of the creditors by value. Generally, a CVA is a most secure way of saving a business.

• It sets out how payments should be made to the company’s creditors.
• It can allow the business to continue trading
• The provision of a statutory moratorium period provides a “breathing space” from any attempts creditors may make to recover money whilst the CVA proposal in being drafted.
• It is often a less expensive procedure.
• External funding may be sought from a third party.
• Creditors may receive
  • regular fixed payments.
  • or seasonal amounts defined by the peaks and troughs of the industry sector.
  • or the sale of the company assets

Pre-pack in association with administration

A pre-pack also allows the business to trade which protects jobs and the relationship with customers. The avoidance of lengthy insolvency proceedings make It is a more cost effective procedure as it avoids lengthy insolvency proceedings reducing both administrative and legal costs.

• A pre-pack must be in the best interests of the creditors
• The existing assets must be worth sufficient to be able to pay the secured creditors.
• This procedure is the least disruptive and the most discreet.
• Investors, competitors, or even current management, may acquire the business or assets during administration to take over operations.
• The new buyer will acquire the assets only and not the liabilities.

In the event of the above mentioned corporate rescue regimes failing, the company will go into insolvent liquidation.

Liquidation

The company ceases trading and all the assets are sold to pay off company debts. There three forms of liquidation:

• Creditors voluntary liquidation – the directors initiate liquidation
• Compulsory liquidation – the creditors initiate liquidation with an application through the courts
• Members’ voluntary liquidation – where there is no financial impairment but the owners wish to close the company.

Giambrone & Partners insolvency lawyers have extensive experience in assisting businesses to navigate the various routes to overcoming financial reverses through negotiation and recovery and where necessary entering insolvency. We can guide and advise you through all the procedures available to bring a business back from the brink and will always aim to support your best interests. 

Olu has extensive experience and expertise in all types of alternative dispute resolution for commercial issues, as well as commercial litigation. Olu advises on complex, high-value, domestic and multi-jurisdiction matters.

Olu assists clients in complex cross-border commercial disputes, shareholder disputes, partnership disputes, contractual disputes, loan facility agreements, secured lending, both corporate and insolvency relating to individuals. Olu has expertise that also extends to real estate both commercial and residential, assisting clients with their freehold sale and purchase as well as assisting in lease extensions, guiding clients through the complexities of buying and selling properties. resolving real estate disputes (commercial and residential) and landlord and tenant law (commercial and residential).

He also has considerable experience in corporate and personal insolvency matters, including preparing and responding to statutory demands, winding-up petitions, investigating company directors and also assists with all aspects of corporate insolvency litigation.

Olu is highly regarded by his clients for his resoluteness in satisfactorily concluding complex disputes swiftly and in line with their commercial objective

If you would like to have assistance or additional information about the options available in company rescue and insolvency please contact Olu's clerk Joseph Crick on JC@giambronelaw.com or please click here.