Liquidation

Is liquidation the only option?

If your client’s business has suffered since the pandemic, liquidation might seem inevitable. But there could be other options, as Richard Simms explains.

The post-Covid landscape has not been kind to UK businesses. Economists from Goldman Sachs have predicted that UK inflation could top 20% as recession looms and fuel prices spiral. In recent research by business insurance company Simply Business, 54% of small business owners cite rising fuel and energy costs as the biggest challenge for them right now.

If your client’s business is struggling with rising bills and heading towards insolvency – or is already in an insolvent position – it’s likely that liquidation is a word that has been batted around. It might not be what they want to do. But when faced with what seems like an impossible situation, they may feel like they have little or no choice in the matter.

That’s not always true. In this article, I’ll look at the potential solutions available to a business in distress that are an alternative to liquidation.

Informal arrangement

For most businesses in trouble, an informal arrangement will be the first option to consider. If the money owing is to one or two creditors, and your client has a good relationship with them, then this type of arrangement is worth pursuing. The key here is for the client to be able to maintain a strong relationship with those owed money and therefore to prevent enforcement action against the business happening without advance warning.

For the creditor, an informal arrangement will sometimes be preferable to a formal one. If the creditor company is a supplier, they might have an eye on doing future business with the indebted firm.

The advantage for your client is that they have the flexibility to create bespoke arrangements with each creditor. It’s important that the creditor agrees that the new payment terms replace the existing terms. Please be aware, though, that your client cannot show preferential treatment to one creditor over the other. If they do end up in a formal liquidation process, any informal arrangement will be looked at by the licensed insolvency practitioner and any preferential situation will be reviewed.

The first step in an informal arrangement is to contact the creditor directly to explain the situation that your client’s company is in and to request a discussion on setting a plan in motion. Once the creditor has agreed to this proposal, it will be your job as the distressed firm’s accountant to help them put forward a credible case to the creditors, based on a detailed cash flow forecast. This means having to prove that any plan to repay the debt is realistic and achievable. With your expertise, you should be ideally placed to help your client devise this plan, which will prove the longer-term viability of their business.

In cases such as these, we are often called upon to provide a sanity check of any proposal. It’s generally worth consulting an insolvency practitioner before you go to your client’s creditors with any type of offer. They are best placed to make sure that it’s fair and legal, so that you can avoid any negative repercussions for your client.

One problem with informal agreements is that by their nature they are informal. The lack of legally binding terms means that at any time the creditor may back out of the agreement and pursue legal action against your client’s company, leaving them completely unprotected. It is vital that all steps and decisions are properly recorded so that the business owners and the advisors are not exposed to litigation if the informal arrangement doesn’t go to plan. A paper trail of agreements with each creditor will be very important.

Creditors’ Voluntary Arrangement

We regularly use a Creditors’ Voluntary Arrangement to provide a sustainable business with the breathing space it needs to stabilise. It will mean compromise from creditors in return for payment from future profits. But that is better for them than the alternative of a possible no return in a liquidation.

Although similar to the informal arrangement discussed above, a Creditors’ Voluntary Arrangement is legally binding. All (unsecured) creditors must also get the same pence in the pound.

Working with an insolvency practitioner, your client will need to create a plan for repayment of their debts, which will then be sent to their creditors. The creditors will then respond to the action plan by voting, at a creditors’ meeting, on whether to accept it.

If it is accepted, your client will then need to work with the insolvency practitioner to implement the action plan and set up a schedule of monthly repayments. This schedule will determine how much each creditor is paid each month and how long the Creditors’ Voluntary Arrangement will last (usually three or five years).

Remember that the terms of a Creditors’ Voluntary Arrangement can be flexible. For example, we have seen occasions where creditors have accepted an arrangement where a liquidation may have looked like the only option. The significantly lower cost and speed of distribution to creditors can mean a quicker and higher payment to creditors. If your client’s company is insolventbut has a core business that works, company administration is a way to protect it from legal action by creditors.

Administration

If your client’s company is insolvent but has a core business that works, company administration is a way of protecting it from legal action by creditors and from potential liquidation. It essentially puts the company’s financial situation on pause while the company director(s) work with an insolvency practitioner to see how – and if – the business can be saved.

Your client’s company needs to have a predictable cash flow and significant assets or value to make a company administration viable. If an administration is decided on and entered into, the company’s chosen insolvency practitioner becomes the administrator during the process.

It’s the insolvency practitioner’s role to look at cash flow and assets, to see what is working – and what is not. They will then send a proposal to the company’s creditors, detailing the situation and confirming whether they believe the company can be rescued. If rescue looks possible, they will also set out how the company will repay its debts.

A pre-pack administration might also be an option. In this case, all or some parts of your client’s business and its assets will be sold to a different company, which in some cases may be owned by the existing company director(s). The proceeds from the sale repay the creditors as much as possible and the old company can be liquidated. Your client’s business, under the new company, can then carry on trading without the debt. Any business sale must be for market value.

The viability of these options will very much depend on the company’s individual situation. For some, liquidation might be the only way forward. If so, remember that – in some cases – they can still start again, sometimes after buying the goodwill and assets of the old company. This is a complex process that must be handled by an insolvency practitioner so that the correct steps are followed. The same principle applies: as it is administration, any sale of assets or goodwill must be for market value.

For businesses that are in a bad position now but have good long-term prospects, liquidation can be avoided. With careful planning, these businesses can be guided through and onto a better future.