Alternatives to Company Liquidation

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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15th August 2024

What are the Alternatives to Liquidating a Company?

For a business in financial difficulty, closing the company might feel like the only option. But there are alternatives to liquidation, as I’ll explore below.

Informal Creditor Arrangements

Informal creditor arrangements can allow you to negotiate extended payment periods or reduce interest rates. They are generally lower in cost compared to formal insolvency procedures, as there are no fees for insolvency practitioners.

Is This the Right Choice?

Clearly, this strategy’s success depends on your creditors’ willingness to cooperate, as they are not obliged to agree. You also need to be confident that you’re not about to receive a winding-up petition or another creditor action. While informal arrangements can provide some necessary breathing room, they are not legally binding and, hence, should be used judiciously. In many cases, a CVA ( see below) will be a safer choice.

>>Read our full article on How to Communicate with Creditors

Company Voluntary Arrangement (CVA)

A CVA is a legally binding agreement with creditors that provides a clear and structured plan to repay a percentage of debts over time, with the remainder written off.

The arrangement can include flexible terms tailored to the company’s financial situation, such as reduced payments or extended timelines. Additionally, a CVA often results in lower costs than other insolvency procedures, as it aims to avoid liquidation and preserve the business.

Is This the Right Choice?

Creditors typically prefer a CVA over liquidation because it offers a better chance of recovering their money. This option works well when there is a realistic prospect of the business recovering and being able to meet the agreed terms^[1]Trusted Source – GOV.UK – Company Voluntary Arrangements.

Implementing a CVA requires the approval of at least 75% of creditors by value. The process involves legal and professional fees, although these are generally lower than those associated with other insolvency procedures. Successful implementation of a CVA depends on the company’s ability to adhere to the agreed terms and improve its financial performance during the repayment period.

Asset Sale

An asset sale involves selling non-essential or underperforming assets to generate cash flow. Quicker and less disruptive than more comprehensive restructuring processes, it may involve tangible assets (property, stock) or intangible assets (intellectual property). However, it’s essential that assets are sold at fair value and not in a manner that disadvantages creditors should the company reach insolvency in the future.

Is This the Right Choice?

While asset sales can provide quick cash, it is important to ensure that the assets sold are truly non-essential to avoid impairing the business’s ability to operate effectively. The sale process should be transparent and aim to achieve the best possible price, despite the need for speed. Engaging professional advisors to assist with the valuation and sale process can help achieve the best outcomes.

Moratorium

A statutory moratorium provides a temporary legal protection period during which creditors cannot take action against your company. It gives the company breathing space to assess its financial situation and explore various recovery options, such as securing new investments or negotiating better terms with creditors.

Is This the Right Choice?

A moratorium is suitable if your business needs urgent protection from creditors to prevent legal actions while you work on a recovery plan. It is particularly useful when there is a viable turnaround strategy in place that requires time to implement. While it provides temporary relief, it obviously does not solve underlying financial issues; the success of a moratorium depends on the company’s ability to develop and execute a successful restructuring plan during this period.

Pre-Pack Administration

Pre-pack administration is a process where a company arranges to sell its business and assets to a buyer before appointing administrators. This method aims to preserve the value of the business and ensure continuity of operations.

Key Benefits

Pre-pack administrations minimise disruption to the business and can help preserve jobs, maintain supplier and customer relationships, and maximise the return to creditors by selling the business as a going concern. This approach can often result in a higher realisation of assets compared to a piecemeal sale. Additionally, it provides legal protection from creditors during the administration process.

Is This the Right Choice?

Pre-pack administration is ideal if your business is struggling but has the potential to be viable under new ownership or restructuring. It is particularly useful when there is a buyer ready to purchase the business, including existing directors, ensuring continuity and stability. The sale must be handled by licensed insolvency practitioners and comply with legal requirements to ensure it is in the best interests of creditors.

Help is at Hand

Whichever path you choose, seeking professional advice is crucial. Consulting with licensed insolvency practitioners such as ourselves can help you understand the implications of each alternative, ensuring that you make informed decisions that are in the best interest of your business and its stakeholders.

Our team at Company Debt is here to support you. We offer free and confidential advice to help you navigate these critical decisions. Speak with an expert today by calling us on 0800 074 6757, or use our live chat service during working hours.