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Company Law: Options for Companies in Financial Difficulty

Thursday, 3 May 2012

The ongoing economic malaise continues to see businesses succumb to the pressures of financial hardship each day. When companies are on a downward spiral it can be very difficult for managers to know what their best options are; inaction can mean that that decision-making is abruptly taken out of their hands.

The mantra of prepare for the worst and hope for the best is perhaps a useful diktat for any director when conditions are as difficult as they are at present. Faced with stark choices, understanding the potential options and what they mean for the company is essential.

Saving the Company

If the directors of a company can see that its short-term prospects are unmanageable but there is a long-term future for part or the whole of the business, a creditors' voluntary arrangement (CVA) may be the best option. This is where the company reaches a negotiated agreement with its creditors for repayment of debt. However, this route does leave the company vulnerable up to the point that the CVA is approved at a creditor's meeting unless it can establish a moratorium - only available to qualifying "small companies".

Administration is a more common initial step as it gives a company time to prepare a CVA proposal; once lodged, a winding-up order cannot be made. Also, the Enterprise Act 2002 has enabled companies to appoint an administrator using an out of court procedure whereby forms are completed and simply lodged with the court and appropriate notice given to qualifying floating charge holders. This procedure cannot be used if there are already winding-up proceedings pending against the company; an application must be made to the court.

A popular, if somewhat controversial, alternative to a CVA or traditional administration is a "pre-pack" administration where an arrangement is made for the insolvent business to be sold to a new company before it enters into administration.

Winding-up and Liquidation

If the company has little prospect of continuing as a going concern, the directors can apply to have the company wound up and placed into a creditors' voluntary liquidation.

If the directors do not wind up the company themselves or fail to act in time to rescue the company then it is likely that creditors will apply to the court to have the company wound up. In that case the company will be placed into compulsory liquidation.

In either case the liquidator will carry out the appropriate investigations and manage the process of liquidating the company.

If your company is facing financial difficulties it is important to seek advice as soon as possible. Rollingsons has experienced commercial lawyers who can assist you; for more information please contact James Crighton via e-mail or by telephone on 0207 611 4848.