Top 5 Considerations for Company Owners Before Liquidation

Before liquidating your company, there are several important considerations to make that could help you to achieve a much better outcome.

1. Liquidation is Not Your Only Option

If you are concerned that your company cannot pay its debts, you must avoid trading while insolvent. You have to act quickly in these situations, but you have other options besides jumping straight in to a Creditors' Voluntary Liquidation (CVL). Insolvency practitioners will often sell you this solution or a CVA (see below), but you must bear in mind that this is the insolvency practitioner's job. It is in their interests to sign you up to one of these processes, but you should consider all options first.

You may be able to meet your debt obligations and avoid insolvency by arranging finance, negotiating with creditors, reducing your costs, or a combination of these. Bringing in new investors to negotiate these points can make the negotiations much more successful, since as "outsiders" they will not have the personal relationships that you have, nor the same level of emotional connection, thus enabling them to reach practical solutions with creditors more easily.

Selling the business or handing over to a new team at this point is another option. Selling while you are in a debt crisis is not the ideal timing of course, but if your alternative is liquidation then you have not lost anything. You may be able to sell only part of the business and still benefit from the help of outside investors in negotiating with creditors, avoiding insolvency, reducing your costs and returning the business to profitability.

Another option for insolvent companies is a Company Voluntary Arrangement (CVA) but this has its own problems, as we shall see next.

2. Company Voluntary Arrangements (CVA) Are EXPENSIVE

A Company Voluntary Arrangement (CVA) is an agreement to pay creditors over a fixed period, allowing the company to continue trading.

You can only get a CVA through an insolvency practitioner. They will charge you to apply for it, as well as charging you to administer it. Fees include an up front "nominee fee" and an annual "supervising fee", with the total amounting to tens of thousands of pounds over the course of the arrangement, which can be up to 5 years. These fees are paid out of the same trust account that the company is paying into, before the creditors get paid.

A CVA is designed to allow debts to be reduced (to a level agreed with the creditors), and hopefully allow the company to return to profitability, which is great. But under the terms of the arrangement, if profits exceed a certain minimum level then a share of these (typically 50%) must also be paid to the creditors, not kept by the business. This is fair enough from the point of view of the creditors, but it can be very disheartening to the Directors when they are getting the business back on its feet, only to find that their CVA payments must increase. It is important to know this in advance, and to consider other options before going down this expensive route.

A pre-packaged administration (or "pre-pack" ) is another alternative. A pre-pack is the pre-arranged sale of a company's assets to a third party (who can be the company's own directors). It takes place within one day and allows business operations to continue uninterrupted. This arrangement is only possible if one or more of the directors personally has the funds to purchase the company's assets at market price, which can be a tall order. Pre-pack administrations are controversial since it is argued that the interests of management and secured creditors are favoured over unsecured creditors, and also that asset prices may be undervalued in these sales. Sales to connected parties are to be independently scrutinised in future, with new requirements for disclosure of information to creditors.

3. Your Insolvency Practitioner Will Not Be On your Side

As soon as your company is considered insolvent, the chief responsibility is no longer to its shareholders but to its creditors. If you appoint an insolvency practitioner, they will act on behalf of the creditors, not you.

Therefore it is important to seek independent advice before speaking to insolvency practitioners, so that you have someone advising you with your interests in mind, not only the creditors' interests and their own.

4. The insolvency practitioner Gets Paid First

To many people it comes as a surprise to learn that insolvency practitioners get paid first, ahead of secured creditors, preferential creditors (employees) and unsecured creditors. Arrangements are always structured in such a way that their fees are paid out of the pot ahead of creditors.

A 2010 study by the OFT found that insolvency practitioners' fees amounted to, on average, 20% of the value of the liquidated assets. In smaller companies the proportion can be even higher, and in many cases of voluntary liquidation it is only the secured creditors and the insolvency practitioner who receive anything.

5. Complaints About This Process Are Not Uncommon

We have the utmost respect for the insolvency profession, but it is important to note that the data shows that complaints against insolvency practitioners are numerous.

The UK government's insolvency service has created a dedicated gateway just to handle complaints against insolvency practitioners, with 941 complaints received in the first year alone:

These complaints came from all quarters - not just from creditors, but from directors, shareholders and others.

Managing an insolvency process is a difficult task, and it is impossible to keep all parties completely happy. No doubt this fact is reflected in the complaints data. If you are aware of the pitfalls ahead of time, you will be better prepared to deal with this difficult process.

Recommendations

Remember that an insolvency practitioner makes a living from the process of dealing with your insolvency, so it is not in their interests to advise you to avoid insolvency. There may be other options open to you, and it is up to you to find them, since they will not be brought to your attention by a liquidator who is trying to convince you that your company must go into voluntary liquidation or CVA.

Firstly, seek impartial advice. If insolvency is unavoidable, you should make sure your affairs are in order first, so that issues such as Director's Loan accounts are not viewed as "preferring creditors" by the insolvency practitioner. If you intend to re-start after liquidation, it is common to buy back the assets from the former company via the insolvency practitioner, often at high valuations - seeking advice in advance can be very valuable here, and may help to avoid saddling the new company with debt.

Insolvency may be avoidable though. Explore your financing options - there may be options open to you that you hadn't considered. Restructuring your existing financing facilities, where possible, can also be helpful.

Restructure your business to reduce costs. This may sound obvious, but it is often overlooked by business owners. Minor cost-saving initiatives can be helpful over the long-term, but in a crisis, larger cuts have to be made. This is hard. Emotions can get in the way. If you can't make these changes yourself, seek help from outside to make them.

Where possible, negotiate with your creditors. You may find yourself at the limit of your goodwill with creditors, so outsiders can also be useful in this regard.

Seek outside investment, or consider selling the business. Outside investors can help with all of the points above, often more effectively than the current management. If you've had enough of dealing with debts, having creditors chasing you, or cashflow problems, you might just want to get out. You could approach your competitors, your customers or your suppliers for possible avenues to exit - the synergies or economies of scale may be attractive to them, and they may consider taking you over. Specialist business investors can also see beyond cash flow issues to recognise value. They make strategic investments, working with businesses to turn them around and find routes to profitability and exit. They will also consider buying or taking over whole companies, if this is what the owner wants. Keep these options in mind, they may save you some worry and some sleep.

Please note: we are not advisors, nor insolvency practitioners. We are investors.