Key Information

Consequences of Creditors Voluntary Liquidation (CVL) and Compulsory Liquidation

Your company will need to close down and stop trading.

Accusations of wrongful trading

In a CVL, the appointed insolvency practitioner is obliged to investigate the conduct of all Directors. A detailed report is sent to the Department for Business, Innovation & Skills (BIS), and if a case if successfully brought against one or more Directors, they could severe penalties. These include a ban from acting as a Director for up to 15 years, and in serious cases prosecution through the courts and a prison sentence may ensue. In a compulsory liquidation, the investigation into the conduct of the Directors is carried out by the Official Receiver.

Personal liability for company debts

Becoming personally liable for company debts can happen if a Director has made a personal guarantee against debts of the business. A creditor can enforce the debt if they are unable to reach an agreement.

Liability for overdrawn directors' current accounts

Each director will be held responsible for repayment of their director's current account should it be overdrawn. The liquidator has the power to force directors to repay this debt if necessary.

All business assets will be sold

All existing assets will be sold off in order to provide a dividend to creditors where possible, and for the insolvency practitioner to collect their fee.

Consequences of a Company Voluntary Agreement (CVA)

Company credit rating is affected

A CVA negatively impacts a company's credit rating, but if the company is in debt already, its credit rating will probably already be damaged. As such, during the first few years of the CVA, you may have to pay for goods on a proforma basis as it will be challenging to get credit. However, once the CVA is over after a period of usually 3-5 years, the company can start to gradually rebuild its credit rating by borrowing on a low-risk scheme and paying liabilities back regularly.

Legal obligation to adhere to the scheme

While there is an element of flexibility in that amendments can be made to the agreement (if accepted by creditors), CVAs can be somewhat rigid. In general, the CVA terms will be quite strict in what it expects the company to pay and over what period. Not adhering to the requirements of the proposal will likely lead to compulsory liquidation.

Failure of a CVA leads to further insolvency measures

A CVA could end up being the precursor to further insolvency procedures if it fails. However, these procedures would be inevitable without an attempt to pay back your creditors and effectively manage your debts. A CVA is one of the few ways to give your company a chance of remaining open and continuing with its trade.

Consequences of Company Administration:

Due to the intense and very active role an administrator plays in dealing with the matter, costs can very quickly mount up in administration matters. When with pre-pack sales, these are highly regulated and there is a much greater onus to demonstrate the sale represents the best value for creditors than in other procedures.

From the point that the notice of appointment is filed in court, you immediately lose all control of the company to the administrator, even if the intention is to propose a company voluntary arrangement in the long run. This can be particularly daunting if the proposed arrangement is rejected and it becomes necessary for the administrator to seek to sell the business. You will have a chance to bid for the business, but no input into the sale process.

Administration is a very public procedure and it is inevitable that your clients will find out that the company has entered the procedure. It is necessary to advertise the fact as well as place notice in any branches and on the company website that the company is in administration. This will cause uncertainty with customers and you will need to rebuild relationships to demonstrate you can still provide the same service they are accustomed to or better.

As with liquidation, the administrator is obliged to examine and report on your actions as a director of the company. This can result in disqualification as a director or having to repay monies to the company which have been handled improperly. It goes without saying that if you have acted properly as a director this will not be an issue that will affect you.

Consequences of Pre-Packaged Administration

The process can generate negative publicity. The directors can be seen to shed liabilities and then carry on as if nothing has happened. Unsecured creditors think they have no say in the process and feel they've lost disproportionately

Company may be sold to a competitor. A competitor is often the most likely buyer as they know the business and will see it as an opportunity to expand.

Loss or control by the directors as new funders/private equity may insist their removal

Tupe rules apply. Job contracts have to be carried over into the 'newco' under TUPE rules so you cannot shed staff to reduce costs in the "newco"

The "newco" will need to be funded. If the business is to be sold to a connected party (e.g. the former directors), they will need to fund the acquisition of the assets. These will need to be independently valued to avoid any issues. It is best to consult a specialist funder to help with this part of the process

HMRC are likely to demand a VAT security deposit. If there is a substantial HMRC debt then HMRC may demand a deposit from the "newco" before they are allowed to register for VAT, as once bitten twice shy! Remember that the business was already insolvent prior to any appointment/reaching an agreement.