In our insolvency and restructuring blog series, we’ve been exploring the various options available to businesses that may find themselves in financial distress, but fundamentally have a sound business that has the potential to succeed.
We’ve covered topics, such as Company Voluntary Arrangements (CVAs), pre-pack administrations, as well as what to consider in the early stages of restructuring.
When it comes to proactive ways to deal with a business that needs a helping hand, these are the most popular and, to a large degree, the most effective methods to keep a business above water. However, there are some less common tools that, in the right circumstances, could help companies to move forward. So, what are they?
Liquidation
Traditionally, liquidation is a terminal process. It’s generally intended to bring the life of a company to an end in an orderly fashion.
However, there are scenarios where liquidation can be used in a more proactive way. In certain circumstances, typically smaller businesses can use liquidation in a similar way to a pre-pack administration, where the assets of the business are essentially reacquired from the liquidator.
It’s also important to note that there are two basic forms of liquidation – insolvent and solvent. On the one hand, if you cannot afford to keep the business afloat and know it’s the end of the line, then it’s worth considering insolvent liquidation as a means to formally close down the business. On the other, if the company has been successful, but you’re in a situation where you want to wind it down (e.g. as part of a wider group restructure, or perhaps after an SPV has served its purpose), then a solvent liquidation may be the best route for you. In that scenario, the assets of the business are realised and distributed to the shareholders.
Moratorium process
The standalone moratorium was introduced via the Corporate Insolvency and Governance Act 2020. It can be used independently (in that it is not automatically followed by an insolvency process – moratoriums in English law have traditionally been attached to administration or a CVA, for example) and is designed, according to the Government, to create ‘formal breathing space in which to explore rescue and restructuring options, free from creditor action’.
Except in certain, limited circumstances, no insolvency proceedings can be instigated against the company during the moratorium period, which is 20 days. It also prevents most forms of legal action being taken against a company without permission from the court.
Insolvency statistics indicate that the moratorium has not been widely used. That might be down to a lack of understanding of the process – new law always takes time to settle of course – but, it’s important to note that, while 20 days may appear a short amount of time in order to resolve serious financial issues, the intention is really that a business uses that time to consider and finalise wider restructuring plans. In reality, the expectation would generally be that the moratorium would be followed by some other form of insolvency process. In that sense, there is no reason why the moratorium cannot be a useful tool in the right circumstances.
What are the options?
When a business finds itself in difficulty, the good news is that there are a number of options they can explore with the support of a professional adviser. Those options have been covered at greater length in this series and the links to our previous blogs are below:
CVAs; and
It’s true to say, of course, that what works for one business may not necessarily work for another. Similarly, what is effective in one sector might not have the same impact in another. The key to insolvency and restructuring is to understand the current state of your own business and to be open minded about the various options available to you. No-one ever wants to seek insolvency advice, but sometimes it is impossible to avoid. Professional support is likely to be hugely valuable if you do find yourself in that position.
If you would like to discuss this blog, or any of the blogs in our insolvency and restructuring series, contact me on (0)7920 237687 or email daniel.clarke@pannonecorporate.com