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Tools to Address Insolvency

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Potential insolvency can be a stressful and lonely time for a company director. Insolvency Practitioners (IPs) have more tools than ever to address the varying needs of distressed companies, and to protect and maintain value, where possible. By acting early in seeking professional advice, directors can ensure they have the widest range of options available and maximise the chance of avoiding insolvency. When time is of the essence, it may be necessary to consider a number of the options in tandem.

For some companies the solution may just be to negotiate with creditors to seek more manageable payment terms whilst being mindful of directors’ duties. Examples include seeking a rent reduction from landlords or entering into a ‘Time To Pay’ arrangement with HM Revenue & Customs.

If a company’s debt reaches an uncontrollable point, a formal procedure may be required. Two new procedures were brought in by the Corporate Insolvency and Governance Act 2020 (CIGA) which are tailored towards rescuing a company:

  • Moratorium: This provides a company with protection from creditor action while the directors pursue a rescue plan. Exit routes may include a successful negotiation with creditors or another rescue-focused insolvency procedure. For a period of 20 business days, which can be extended, the company obtains a payment holiday for its non-finance pre-moratorium debts and is protected from action and proceedings by its landlords and other creditors. New debts incurred after the commencement of the Moratorium will however need to be serviced. An IP will act as the Monitor to oversee the Moratorium, and if necessary, must terminate it if rescue of the company becomes unlikely.
  • Restructuring Plan: A company has the ability to propose a compromise to its creditors to implement restructure of its finances. The new procedure allows for a restructure without the formal involvement of an IP. The Restructuring Plan allows the court to approve an arrangement that binds dissenting classes of creditors, known as a ‘cross-class cram down’. In order to bind such creditors, the company needs to demonstrate that they will be no worse off than in the alternative scenario, such as an Administration.

More traditional and well-established options also exist:

  • Company Voluntary Arrangement (CVA): A CVA is an agreement with the company’s creditors to comprise an element of the debt and can be combined with an opportunity to restructure the business. Typically, it will involve monthly contributions over a number of years or an injection of a lump sum payment. To proceed, 75% of voting creditors need to approve the arrangement (subject to certain conditions), and once approved it is binding on all existing creditors. The directors will remain in control of the company, with an IP being appointed as Supervisor to ensure the terms of the proposal are implemented.
  • Administration: Administration is a rescue procedure that involves the appointment of an IP to pursue a strategy to provide the best outcome to creditors whilst providing legal protection from creditor enforcement. Depending on the circumstances, the strategy can take a number of different routes:
    o   A ‘Pre-pack’ involves the Insolvency Practitioner marketing the business and assets and negotiating a sale prior to their appointment as Administrator. The sale is typically completed as soon as possible after the appointment of Administrators to provide minimal disruption to the business and its stakeholders. The sale could be to the existing management
    o   Alternatively, the IP may decide to trade the business whilst seeking a sale as a going concern or preparing a proposal for a CVA. In some circumstances greater control can be left with the management. In a so called ‘light touch’ Administration the IP can consent to the existing directors retaining certain powers within agreed limits, enabling them to continue to run the business day-to-day with overview from the Administrators, while the exit route is explored
    o   Administration can also be used to close down the business if it can provide a better return to creditors than liquidation
  • Creditors’ Voluntary Liquidation (CVL): Placing the company into liquidation is a terminal event and should always be seen as a last resort. This will involve the cessation of trading and an IP being appointed as Liquidator to the sell the assets for distribution to the company’s creditors.

Mercer & Hole have a wealth of experience in assessing a company’s financial position and advising on the options to preserve the business where possible, maximise the return to creditors and assist management in complying with their statutory duties. Our licensed Insolvency Practitioners will use formal insolvency procedures constructively, if they are necessary.

Louis Byrne Corporate Restructuring Manager

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