Business Rescue and Recovery
When we use the term “corporate” this will usually apply to a limited company, but in most instances described below, it will also apply to a partnership or a limited liability partnership (LLP). If you are a sole trader or an individual please see the personal information pages.
“Our focus, first and foremost, is to rescue a company or its core business and restore its value”
It may be that matters have progressed too far to be managed by anything except a formal insolvency rescue procedure although it does not mean that the core business itself will fail. It may still be possible to extract the core business, place it in a new company and for the directors to continue running that company in the future. It is the duty of an Insolvency Practitioner to obtain the best solutions for creditors, but this will often coincide with a director’s desire to buy the business back in order to continue it.
The process of “administration” is by far and away the procedure of choice when rescuing a company or its business.
There are three statutory purposes for which an administration can be used:
- rescuing the company; or
- achieving a better result for the company’s creditors than if it went into liquidation; or
- making a payment to secured or preferential creditors.
This procedure is useful where:
- The company is insolvent and directors are concerned about their personal exposure;
- Cash flow pressures are building, but there is a strong core business that can be preserved and is capable of continuing if the current pressures were removed;
- There is a need to quickly sell the business to prevent it from failing;
- Agreement with creditors on how to deal with their debts cannot be achieved in a restricted timescale – major creditors may be playing ball but significant minority creditors may be threatening legal action (e.g. a winding-up petition) which could close the company down;
Except for a limited number of circumstances, a company can be quickly and easily put into administration with a simple filing of some forms at Court. The company is then protected from its creditors who are prevented from taking any sort of enforcement action against the company and precipitating its failure. It creates a breathing space in which control can be exercised by the Administrator over continued trading and proposals can be formulated to seek the agreement of creditors to the way forward.
Receivership comes in three flavours:
1. Administrative Receivership
An Administrative Receiver, who must be a licensed Insolvency Practitioner, is appointed by the holder of a floating charge, typically a bank. The receiver’s primary duty is to the floating charge holder who appointed him, with only a secondary duty to the other creditors as a whole. This means that he will conduct the receivership for the primary benefit of the charge holder, which could be to the detriment of other creditors.
The company is very rarely saved as a continuing entity, although often the core business is sold on, in a way very similar to administration. In the majority of instances there will be little or no return to any creditor other than the floating charge holder.
2. Fixed Charge Receivership (inc LPA Receivership)
A fixed charge receivership is where a secured creditor (e.g. a bank) holds a fixed charge, rather than a floating charge, over specific assets of a company. If the asset covered by the charge is land and buildings, the Receiver is usually appointed under the terms of the Law of Property Act 1925 and is referred to as an “LPA Receiver”. A Receiver is appointed over just the assets caught under the fixed charge, rather than the company as a whole, and has the power to sell those assets and pay the proceeds back to the fixed charge holder. The terms of the charge may allow the receiver to continue trading with the asset.
3. Court Appointed Receivership
These are very rare. Sometimes, parties involved in a legal action or dispute may wish to appoint an independent third party to protect and manage the asset(s) that are in dispute. An application is made to the Court for the appointment of a Court Appointed Receiver, who need not be a licensed Insolvency Practitioner. The Court appoints the Receiver, who will then be an Officer of the Court, and the Order of Appointment specifies what powers the Receiver has over the assets which he will control. In this way the asset is protected whilst the dispute is resolved. The Receiver then hands the asset back, or realises it and distributes the cash in accordance with the terms of the resolution of the dispute.
Company Voluntary Arrangement (“CVA”)
A Company Voluntary Arrangement is essentially a formal deal between a company and its creditors to pay back some or all of those creditors over a period of time, in order to prevent the company failing. On the agreement of a CVA, all the creditors are frozen and profits are then generated from continued trading which are used to repay the CVA creditors, whilst the company continues to pay ongoing liabilities in the normal way.
The directors remain in control of the company and its continued trading, but a Supervisor is appointed to ‘supervise’ the company to ensure it meets the terms of the CVA.
In our experience, a CVA is an exceptional tool that can be used to restructure the debts of a viable company in order to avoid failure, liquidation etc. However it is not suitable in all circumstances and advice is needed to determine if a CVA is appropriate, including using the CVA process in conjunction with other rescue procedures.
Scheme of Arrangement
This type of process is rare. It is similar to the Company Voluntary Arrangement procedure, but has a much higher level of involvement by the Court, as the Court needs to sanction the scheme. A scheme is often used to effect a debt-for-equity swap in an insolvent company where creditors exchange their debt for shares and partake of future profits. In this way it is much more flexible than a CVA and does not require constant profit generation. Alternatively, a scheme can be used to ring-fence contingent future liabilities to prevent them being a cause of failure for an otherwise viable company.
The process is more complicated than a CVA and due to the Court involvement, tends to be lengthy and involve high costs. It is therefore generally used in respect of larger or publicly quoted companies, but does have its place in assisting smaller companies.