Most SME owners have faced financial distress at some point, especially given the difficult economic climate over the last few years.
In such situations, understanding the difference between business rescue and liquidation is crucial. These are two of the main options available to navigate your way through difficulties.
There’s a lot to be said for taking a step back and looking at the options open to you. Would business rescue or restructuring work for you, or does liquidation look like the only option?
Choosing the right option for your company
The right choice will differ based on each company’s situation. As such, it’s worth considering the following five factors before taking action.
How likely is a recovery?
Insolvency expert and Forbes Burton’s Senior Client Manager, Ben Westoby recommends that concerned directors should re-assess their business models, market demand, and potential for growth. “The business landscape can change significantly over a short space of time” Westoby says. “It’s possible that once-viable plans are no longer enough to stay open.”
If your business has a solid foundation and you suspect that any financial issues are temporary, business rescue options can set your company back on track.
Debts
Consider your debts in relation to your cash flow. What’s the honest likelihood that you’ll be able to pay these debts off? If there are serious doubts, then liquidation should be a consideration.
Speak to stakeholders
Gauging the mood among other shareholders and directors is crucial when determining your next step. Are they keen to support any recovery efforts, or are they looking to call it a day?
If everyone is on the same page when it comes to rescuing the company, the chances of recovery are far greater.
Seek professional advice
It’s recommended to speak to professionals about your situation. They will have seen thousands of different cases and may be able to see potential for recovery that you can’t. At the same time, as an outsider, they may be more critical of the company’s survival prospects than yourself.
Be mindful of which company you are asking, however. Westoby adds that “many insolvency practitioners deal solely in company closures. As you might imagine, those that don’t offer recovery solutions, and only make money from liquidations, are unlikely to tell you that you your business could be saved.
“Speaking to a consultancy such as Forbes Burton instead, which offers a range of different business solutions, will give you a truthful answer as to your best option. Some (like Forbes Burton again) will even offer a free initial consultation that will give you an idea of the most sensible route to take.”
Timeframe
There’s little use spending time in crafting a perfect rescue plan that provides week-by-week objectives if the business will run out of money tomorrow. Recovery generally takes time, and if you don’t have any to spare, a liquidation may be the only route available.
Does your company qualify for liquidation?
Take our simple liquidation test to find out if a company liquidation is viable for your particular situation.Even if your company doesn’t qualify for a liquidation, you still have several options open to you. Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation to find out the best route for you.
Business rescue: a lifeline for financial distress
Primarily used in the context of corporate insolvency, business rescue refers to the process of attempting to save a financially distressed company from being liquidated. Business rescue consists of various procedures and mechanisms that are designed to help struggling businesses get back on their feet.
Some of the key business rescue mechanisms available in the UK include:
Company voluntary arrangement (CVA)
A CVA is an agreement between a company and its creditors to restructure its debts and repay them over an extended period. The company can continue to trade for a period of time while it pays off its debts.
With a CVA, a licensed insolvency practitioner is appointed to put forward a formal proposal to creditors to find in which the terms of the debts make them easier to pay. When companies fold, there’s often not enough money available to repay all of its debts. This is why many creditors would prefer to receive some rather than none of the money due to them, even if it takes longer to receive than first assumed.
Both you and your creditors come to a formal agreement in which the creditors accept a sum of money as settlement towards the money owed. 75% of your creditors must agree to this in order to progress.
CVAs allow you to carry on as a director and keep the company trading.
Administration
One of your other options as an insolvent business looking to be rescued is to enter into administration.
Administration is a court-led process where an insolvency practitioner is appointed to take control of a company. The typical result is that the company is either restructured or sold as a going concern
This is an option that takes control of the company’s assets and repays owed money to creditors.
When your company goes into administration, they are given protection against any legal action. An insolvency practitioner is appointed as administrator and whilst they are overseeing the case, no other party can apply to wind-up the company.
Fast-track Company Rescue Plan
Fast-track company rescue plans are used in cases where an otherwise viable company is struggling to pay its day-to-day bills. They are used as a more cost-effective and informal solution to a company voluntary arrangement (CVA).
In simple terms, all the company debt is moved into one manageable monthly payment. This allows the company to continue trading while it makes affordable payments to its creditors. Because it is an informal process it’s usually very quick to set up and get running, as long as there are no creditors looking to take action against the business.
This plan gives the company breathing space to be able recover and become viable once again.
Fast-track Company Rescue Plans are a great way to allow businesses to find some breathing room while they wait to become profitable again.
Business restructuring
Restructuring is a way of tweaking business operations with the intention of streamlining or making the company more profitable.
When a business is in difficulty, restructuring often involves setting up a new company with the same directors and shareholders.
The new company then takes over the operations of the old business. The old company is then closed down and any debts it holds are settled.
The most appropriate business rescue mechanism will depend on the specific circumstances of the company and its creditors. It’s important to seek professional advice to assess the options available. This will assure your company follows the appropriate procedures.
Liquidation: the end of the road for insolvent businesses
Liquidation, on the other hand, is a process that involves winding up the affairs of an insolvent company. It then distributes its assets among creditors to satisfy outstanding debts.
This process signals the end of a company’s operations, and its assets are sold off to generate cash for debt repayment. Liquidation is typically the last resort for businesses that have no reasonable prospect of recovery. It is initiated when it’s clear that continuing to trade would only result in further losses for creditors.
Liquidation options
Liquidation is a means of formally closing a company. As a legal insolvency process, a licensed insolvency practitioner must be appointed to carry this out.
Through the liquidation process, your company’s assets are sold, with any funds raised distributed to the company’s creditors. Once this has taken place, the business is dissolved and struck off from the registrar of companies.
There are two main types of insolvent liquidation:
Compulsory liquidation
This is where a company is forced to close by its creditors. For any creditor to begin this process, they must be owed more than £750 individually.
Should this scenario happen, the director or owner of the business will have little to no control over the process.
Creditors owed money can issue a winding-up petition to the court. Once one of these has been issued, it’s served to the company and advertised in The Gazette seven working days later. The court then decides whether to approve or dismiss it.
If the petition is successful, courts can then force you into compulsory liquidation. This is the most serious form of liquidation and as such it’s always best to act quickly. Entering into voluntary liquidation instead is an option many take in this situation.
Creditors’ voluntary liquidation (CVL)
The other main form of liquidation is a creditors’ voluntary liquidation. Unlike compulsory liquidation, voluntary liquidation is a completely voluntary process that is initiated by your company’s directors and shareholders.
Creditors’ voluntary liquidations are entered into by directors that choose to voluntarily end the business and liquidate all assets. This is an option that’s only open to insolvent companies and is a good way for directors to take control of closures before they’re forced into compulsory liquidation.
One of the advantages of a CVL is that it shows you have taken tangible steps towards meeting your debt obligations by paying back creditors.
Entering into this process also demonstrates your awareness of your legal duty to creditors, lessening the risk of being investigated for wrongful trading. Seen as the more responsible route to take, a CVL also provides more options for directors should they decide to move on to other ventures in the future.
In both circumstances, an insolvency practitioner will conduct an investigation into your company’s transactions.
If any evidence of wrongdoing is uncovered, it is reported to the Insolvency Service, potentially leading to fines or a disqualification from being a director again. Directors can also be personally liable for any debt.
We can put you on the right track
Facing financial distress is a challenging experience for any SME owner, but understanding the differences between business rescue and liquidation is crucial for making informed decisions that protect your business’s interests.
Business rescue offers a lifeline for companies with potential for recovery, while liquidation is the final step for businesses with no hope of survival.
By carefully considering your company’s situation and seeking professional advice, you can choose the right path for your business and navigate through financial turmoil.
Call our team for free, no-obligation advice today on 0808 280 6037 or book a free consultation
