Non-statutory solutions

Non-statutory solutions have no formal basis in legislation which makes them a more flexible and less costly solution to the company’s problems, but because they are not defined in legislation, they may not be binding on all parties and they tend to result in a higher level of risk for the company and its directors. 

Do nothing

The company could continue to trade, however the directors have a duty to not continue to trade when the company is insolvent and doing so may leave the directors personally liable for any losses that the company suffers when they knew or ought to have known that the company was insolvent. 

In addition to any personal liability, if the company subsequently enters a formal insolvency procedure the directors may be disqualified from acting as a director for up to 15 years if they traded when they knew or ought to have known that the company was insolvent.

Informal agreement

When a company is experiencing only short term difficulties and the directors consider that it is only technically insolvent, they may be able to take steps to reach an informal agreement with creditors to postpone or re-structure debts and give the company time to recover. As with the “do nothing” option above, this could lead to personal liability or disqualification if the company subsequently enters a formal insolvency procedure, so it is only usually an option when a specific re-financing package or alternative solution has been identified and the outcome is fairly certain.

Re-financing

A wide range of re-financing options are available. Many, but not all, will require some form of personal guarantee from the directors and/or the granting of specific security over one or more of the company’s assets.

The availability of a re-financing solution will depend on a variety of factors including the company’s past credit history, the willingness of the directors to guarantee any borrowing, whether the company has any free assets to offer as security and the amount of secured borrowing it already has.

Sale

It may be possible to sell the company if there is a buyer who is willing to take responsibility for the outstanding liabilities. This is more likely to be an option where the company has a strong brand identity or some intellectual property that has a value to the purchaser beyond the physical value of its assets. In a recession, however, buyers may be difficult to find and they may only be willing to pay for parts of the company (e.g. the brand or intellectual property) without assuming the liabilities.

Statutory Solutions

There are a variety of solutions set out in the legislation, primarily the Insolvency Act 1986 and latterly under the Corporate and Insolvency Governance Act 2020. These solutions are generally binding on the parties involved and there is a body of case law to assist with resolving any disputes. By entering into a statutory insolvency solution as soon as they become aware that a company is insolvent, directors are usually protected from personal liability for the company’s losses, although there are still circumstances where their prior conduct could leave them liable financially and/or subject to disqualification proceedings.

Moratorium

A Moratorium brought in by the Corporate and Insolvency Governance Act 2020, and implemented into the Insolvency Act 1986, is designed to protect a business while plans are developed either to put in place a financial restructuring, a CVA, a Restructuring Plan, or an Arrangement or Reconstruction to rescue the company as a going concern. It is specifically useful in circumstances where a Company is under significant creditor pressure, such as CCJs, legal actions, bailif action, or  a winding-up petition. 

The Moratorium allows the directors to retain control of the company while the company continues to trade, and it provides a breathing space from creditors to allow various options to be pursued in rescuing the company as a going concern.

The Monitor is required to determine whether the criteria for entering a Moratorium continue to be met and whether ongoing trading liabilities (and certain pre-Moratorium debts) are paid as and when they fall due during the Moratorium period.

Company Voluntary Arrangement ("CVA")

A Company Voluntary Arrangement ("CVA") is a procedure which enables an insolvent company to reach an agreement with its creditors to delay or compromise the payment of its debts. 

A CVA is flexible and can be adapted to meet the needs of any business. In essence, a CVA will replace the terms of the company's existing contracts with its creditors with new terms as set out in the CVA proposal. For example, the proposal might require the company to pay a fixed monthly sum into the arrangement for a set number of years so that creditors receive a minimum dividend. While the payments are maintained and no further action is necessary, the directors retain control of the company and once the arrangement is successfully concluded the company remains in the control of its existing members and management. 

Creditors will usually agree to support such a CVA where it can be shown they will achieve a better outcome than if the company was liquidated and the business and assets sold. They require a 75% majority in value of creditors comprised in the CVA voting to approve, creditors can also modify the proposal when voting. 

While directors prepare a CVA proposal, protection from creditors may be obtained by use of the moratorium, or administration procedure prior to proposing a CVA.

Scheme of Arrangement - Companies Act 2006

A Scheme of Arrangement is a formal statutory procedure under Part 26 of the Companies Act 2006 under which a company may enter into a compromise or arrangement with its members or creditors (or any class of them). There is no need for a company to be insolvent under English law for a Scheme of Arrangement to be available. 

Schemes of Arrangement are flexible as legislation does not prescribe their terms, creditor approval and court sanction are necessary however. If a majority of certain classes of creditor approve a Scheme of Arrangement it can bind other classes to it, such as secured creditors. 

Restructuring Plan - Companies Act 2006 

A Restructuring Plan is set out in Part 26A of the Companies Act 2006, inserted by Schedule 9 of the Corporate and Insolvency Governance Act 2020. The process is closely modelled on the process for a Scheme of Arrangement. The Company must be viable and a business as a going concern, and the procedure can be used with a cross-class clam down available.

Creditors’ Voluntary Liquidation ("CVL")

Creditors' Voluntary Liquidation is the process where the directors of an insolvent company can voluntarily take steps to wind up the company. The directors call meetings of the company's shareholders and creditors to consider resolutions to wind up the company and to appoint a liquidator.

Once appointed, the liquidator takes control of the company from the directors and although a short period of trading may take place to complete outstanding contracts, it is more common for the company to cease trading and its assets are sold to repay the costs of the liquidation with any surplus being paid to creditors in priority set out in the legislation.

Compulsory Liquidation ("WUC")

Compulsory Liquidation is the process where the court orders that the company is wound up.  The Official Receiver is initially appointed liquidator although he may subsequently be replaced by an insolvency practitioner.

Once appointed, the liquidator takes control of the company from the directors and although a short period of trading may take place to complete outstanding contracts, it is more common for the company to cease trading and its assets are sold to repay the costs of the liquidation with any surplus being paid to creditors in priority set out in the legislation.

Administration

An Administration is designed to protect a business while plans are formed either to put in place a financial restructuring to rescue the company, or to sell the business and assets to produce a better result for creditors than a liquidation.  

Once an administrator is appointed he takes over the running of the company from the directors and is responsible for any decision to continue or discontinue trading and he has control over how the company and/or its assets are disposed of. The ability to continue trading depends on the availability of funds for working capital.

Members' Voluntary Liquidation ("MVL")

A Members' Voluntary Liquidation is a solvent liquidation that is often utilised to wind-down a company at the end of its trading, or when directors no longer want to continue, but there are minimal debts to clear and significant assets to distribute. 

In certain circumstances there can be a tax efficient benefit to closing down a company via a MVL rather then dissolving the company, directors must make an enquiry into the assets and liabilities of the company and be of the opinion that all debts can be paid off plus interest and costs within twelve months.