Corporate Rescue and Recovery
my primary focus is to rescue a company or its core business
If things have progressed too far to avoid a formal insolvency procedure it does not mean that the core business itself has to fail. It may be possible (if done in the right way!) to extract the business, place it in a new limited company and for you, the directors, to continue running that company in the future – the so-called “phoenix”. The various ways this can be done are:
administration
The process of “administration” is often the best choice when rescuing a company or its business. There are only three statutory purposes for which an administration can be used:
1. rescuing the company; or
2. achieving a better result for the company’s creditors than if it went into liquidation; or
3. making a payment to secured or preferential creditors.
This procedure is useful where:
- the company is insolvent and you are concerned about your personal exposure as a director;
- cash flow pressures are building, but there is a strong core business that can be saved and is capable of continuing if those pressures were removed;
- there is a need to quickly sell the business itself to prevent it from failing (possibly as a “pre-pack”); or
- terminal enforcement action (e.g. a winding-up petition) is being threatened by a creditor which, if prevented, could make any outcome better than allowing such enforcement to continue.
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. It is then protected from its creditors who can’t take any enforcement action against it for their debts. This creates a breathing space in which control can be exercised by the Administrator over the company and its business (potentially allowing trading to continue) and proposals can be formulated to seek the agreement of creditors to the way forward.
receivership
These are pretty rare in recent years, but receivership comes in three flavours:
administrative receivership
An Administrative Receiver is appointed over the company whose primary duty is to their appointor, 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 appointor, which could be to the disadvantage 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 appointor.
fixed charge receivership (inc LPA receivership)
A fixed charge receivership is where a creditor holds a fixed charge over specific assets of the 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 often referred to as an “LPA Receiver”. A Receiver is appointed over just the assets stated in the fixed charge, rather than the whole of the company, and has the power to sell those assets even if their sale would close the rest of the business down. The terms of the charge may also allow the Receiver to continue trading with the asset.
court appointed receivership
These are pretty rare. Where parties are involved in a legal action or dispute they 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 doesn’t need to 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 sells it and distributes the cash in accordance with the terms of the resolution of the dispute.
company voluntary arrangement (CVA)
A CVA is essentially a 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. The company continues to pay new 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 my experience, a CVA is an exceptional tool that can be used to restructure the debts of a viable company in order to avoid failure or formal insolvency. 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 very rare. It is similar to a CVA (above), but has a much higher level of involvement by the Court, as the Court needs to sanction the scheme. A scheme is often used where creditors exchange their debt for shares and get paid from 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.