Insolvency occurs when a company can no longer pay the debts it owes to its creditors. Insolvency is never a desirable outcome for any business, but unfortunately, it’s something that all businesses need to plan for in case their finances take a turn for the worse.
Given the current economic state of the country, insolvency is occurring frequently across a wide range of sectors and industries. However, insolvency doesn’t have to mean winding down the company or closing the business. In fact, if your company is heading into the red zone, there are several forms of voluntary insolvency that can help you to save the business and rebuild for the future.
In this article, we explore the different types of voluntary insolvency that are available to struggling companies in the United Kingdom.
Why Would I Voluntarily Enter into Insolvency?
A company is deemed under the 1986 Insolvency Act to be insolvent when it can no longer pay its debts. This can happen for any number of reasons, from bad planning or poor management through to unprecedented pandemics and economic downturns.
Importantly, a company is deemed insolvent by virtue of their insolvency. If creditors can’t be paid, the company is insolvent. If nothing is done, the company can be liquidated on the demands of its creditors, with the proceeds from sales of the business being used to pay off the money owed.
Before that worst-case scenario happens, a business that has become insolvent has a number of voluntary insolvency options that can help to either turn things around or secure the best possible winding down deal: a deal that benefits all parties involved.
There are three major forms of voluntary insolvency that we’ll look at in more detail:
- Company voluntary arrangement (CVA)
- Creditors’ voluntary liquidation (CVL)
In case you’re wondering why the term bankruptcy hasn’t been used in this article, that’s because bankruptcy isn’t a legally defined term in UK insolvency law.
Company Voluntary Arrangement (CVA)
A company voluntary arrangement, or CVA, is one of the first options that any company heading towards insolvency should look at.
A CVA is a voluntary agreement that’s made between the company in debt and the creditors it owes money to. A CVA is essentially a way for the company to repay its debts, with all parties involved agreeing on new repayment schedules and new repayment terms (as long as 75 per cent of creditors are in agreement).
A CVA gives an insolvent business valuable breathing space, as creditors are no longer able to aggressively pursue them for money. A CVA is a legal process that must be instigated by a licensed insolvency practitioner. The business makes a single repayment each month, which is then distributed to the creditors by an insolvency practitioner.
A CVA can lead to business turnaround and recovery. However, if repayments aren’t made then once the agreement has ended creditors can again pursue liquidation.
Voluntary administration is another common way to escape insolvency. Administration requires putting control of all business decisions into the hands of an outside administrator (usually an insolvency practitioner) who then makes the necessary changes to turn the company around.
Administration isn’t a preferred option, as company directors have to give up their decision-making power (whereas company directors stay in charge through a CVA). However, an outside administrator is likely to make sweeping changes that might not have been seen as possible or feasible from the inside.
The ultimate aim is for the business to start turning a profit again, in order to pay off its debts and eventually achieve profitability and growth once more.
Creditors’ Voluntary Liquidation (CVL)
If other options have failed, then businesses can opt for a creditors’ voluntary liquidation or CVL. This is a voluntary winding down of a business, which is instigated by an insolvency practitioner on behalf of the company directors or business owners.
The idea is to negotiate favourable terms with the creditors, rather than a forced liquidation. A CVL inevitably involves the business being sold off and the majority of that money going towards paying off the creditors.
While the outcome is the same as a forced liquidation with business ceasing altogether, the process is much more amenable to both sides.
Legal action can be avoided, staff can negotiate redundancy packages, and creditors can try to secure more of the money they are owed.
Which Voluntary Insolvency Arrangement Is Best for Your Business?
Voluntary insolvency isn’t something to take lightly, and each company and each business will have different options open to them.
There’s no ‘one size fits all’ package when it comes to voluntary insolvency, which is why it’s so important to seek expert help from a dedicated insolvency practitioner.
Independent advice is essential for any foolproof recovery plan, but remember, it’s always in your business’s best interest to start planning for insolvency before you run out of cash. With the right help and the right planning though, voluntary insolvency can save your company from involuntary liquidation.