Insolvency practitioners can use a number of procedures to resolve the problems. The skill is establishing which method is most likely to achieve the desired results.
The first thing to establish is whether the firm in question is a limited company. If it is there are three options – liquidation, administration and company voluntary arrangements.
Liquidation is the terminal situation when there’s no prospect of rescuing the firm or disposing of it as a going concern. As a result its assets are disposed of by any means necessary, often at auction. discharge the claims of the company’s creditors, initially secured ones such as banks and then the rest.
Then there’s administration. An administrator will usually be appointed by company directors to get better returns from assets than would be the case with liquidation.
In order to do so, the administrator might continue the firm’s trade with a view to finding a buyer.
Unfortunately, this is often impossible due to the lack of available funding for wages, rent and purchases.
Alternatively, they may decide there’s no prospect of disposing of the business as a going concern and break it up instead.
But if a buyer is already on the scene and a price can be agreed, a pre-pack administration may be the most appropriate way forward to preserve the business and maximise the value of its assets for the benefit of creditors.
In such cases, the sale is agreed in principle before the appointment of the administrator.
As soon as they come on board they will dispose of the firm’s assets. In this way the risk of damage is minimised and there are often additional benefits such as preserving jobs.
Company voluntary arrangements are considered when it’s vital to save the actual company rather than its business, such as when there are important contracts that would be lost if an alternative procedure was adopted.
A CVA is a deal between the company and its creditors, overseen by an insolvency practitioner, to give the firm breathing space to sort out its affairs while creditors take a back seat.
Such an arrangement might last up to five years.
So what if the business isn’t a limited company? If it is a sole tradership or partnership then the proprietors are personally liable for the firm’s debts if its assets are insufficient to meet creditors’ claims.
But if the business can offer creditors a better return by continuing to trade rather than being broken up, insolvency practitioners would propose an individual or partnership voluntary arrangement. These are similar to CVAs.
Nevertheless, if the position is hopeless the owners of the firm would face bankruptcy. In this scenario the business and their personal assets would be sold for the benefit of creditors, although there are specific rules relating to the principle residence of bankrupt parties.