When a business encounters financial difficulty, the stakes are high, and the pressure on the management team can be intense. However, numerous viable options are available that can help turn around the situation or mitigate the impacts of financial distress. Understanding these options—including Company Voluntary Arrangements (CVA), insolvency procedures, bankruptcy, and selling the business as a going concern—is crucial for any business leader facing such challenges.
Understanding the Severity of the Financial Difficulty
Before deciding on a course of action, it’s essential to assess the extent of the financial difficulties. This involves a thorough review of the company’s financial statements, cash flow forecasts, and other pertinent data. Identifying whether the problems are due to short-term cash flow issues, long-term structural problems, or both will help determine the most appropriate solution.
Option 1: Company Voluntary Arrangement (CVA)
A CVA is a formal agreement between a company and its creditors that allows a portion of its debts to be paid back over time. This can be a highly viable option for businesses that are viable in the long term but currently face liquidity issues. The process must be supervised by a licensed insolvency practitioner who acts as the nominee and subsequently the supervisor of the CVA.
Benefits:
- Allows the business to continue operating.
- Directors remain in control of the company.
- Prevents legal action by creditors during the term of the CVA.
Process:
- Proposal development by an insolvency practitioner.
- Creditors’ meeting to vote on the proposal (requires 75% by value of creditors voting in favor).
- Implementation of the agreement if approved.
Option 2: Insolvency and Administration
If the company’s financial situation is such that it cannot pay its debts but might be viable in the future, entering into administration might be the right choice. Administration serves to protect the company from its creditors while a longer-term strategy is developed and implemented.
Benefits:
- Protection from creditors while restructuring plans are put in place.
- Potential to sell the business as a going concern.
Process:
- Appointment of an administrator, usually an insolvency practitioner.
- Administrator assesses all options to rescue the company.
- Implementation of the rescue plan, which could involve restructuring, selling the business, or more drastic measures like liquidation.
Option 3: Liquidation and Bankruptcy
Liquidation, also known as winding up, is the process of selling all assets before dissolving the company. It typically occurs when there is no feasible way to save the company. Bankruptcy applies only to individuals (including sole traders) and partnerships, not companies.
Liquidation Benefits:
- Provides a clean break for stakeholders.
- Stops the accrual of further debts.
Bankruptcy Benefits:
- Clears most debts for individuals and sole traders.
- Allows individuals to make a fresh start after a set period, typically 12 months.
Process:
- An insolvency practitioner is appointed as a liquidator or trustee in bankruptcy.
- Assets are sold, and proceeds are distributed to creditors.
- The company or individual is discharged from most remaining debts post-process.
Option 4: Selling the Business as a Going Concern
Selling the business as a going concern means the business is sold including its assets, and it continues to operate under new ownership. This can be an appealing option if the underlying business model is sound but requires more capital or a different management approach to become profitable.
Benefits:
- Ensures the business legacy continues.
- Protects jobs and maintains supplier/customer relationships.
- Potentially avoids the stigma of bankruptcy or liquidation.
- Very difficult to achieve unless the buyer can see benefit in the acquisition, something that can be hard to do.
Process:
- A valuation of the business is conducted to establish a fair market price.
- The business is marketed to potential buyers, often by a business broker or through private networks.
- Negotiation and sale completion with a suitable buyer.
Conclusion
Deciding the best course of action requires careful consideration of the company’s specific circumstances, the reasons for its financial difficulties, and the long-term prospects for the business and its industry. Directors should seek advice from financial advisors and insolvency practitioners to navigate these complex processes and ensure that the chosen strategy aligns with the best interests of all stakeholders involved.