Do nothing and await HMRC action (winding up compulsory)
This will likely result in a winding up petition being issued by HMRC or another creditor on the Company and subsequently a winding up order being made against the Company, resulting in the end of the Company via compulsory liquidation.
The main problem is the lack of certainty as you will not know of the timing of the issue of the petition (if at all). Doing nothing is not recommended as a sensible approach to be taken by the directors of the Company, who remain responsible for the day to day position of the Company.
As the Company directors, you are correct to be considering all options. This will include seeking HMRC’s/creditors agreement to an informal repayment plan.
If HMRC has already previously agreed to a time to pay payment plan with the Company and the Company failed to meet its obligations under the time to pay agreement then (from experience) this means that they are unlikely to approve an informal agreement.
Company Voluntary Arrangement (“CVA”)
A CVA is a legally binding agreement with your company’s creditors to allow a proportion of debt to be paid back over time (usually 3-5 years). Creditors are asked to vote on a CVA proposal put together by the Company. A CVA proposal would typically seek to repay a minimum of 40 pence in the £ in respect of existing/historic debt, meaning that the Company would need to find a minimum of £XXX in respect of contributions to existing debt (over a 3-5 year period) as well as have sufficient cash flow to meet the costs of the CVA process and fund on-going trading during the CVA period.
HMRC are usually the largest creditor meaning they would have the casting vote as initially 75% (value) of creditors voting will be required to approve the proposal (and 50% of non associated votes) in order for the CVA to be implemented. If the Company has failed to meet previous obligations under any time to pay agreement it means that HMRC is unlikely to approve a CVA.
Creditors Voluntary Liquidation (“CVL”)
As creditor pressure is mounting it is important that you take positive action as soon as possible. Whether you are hoping to rescue some or all of your underlying business or simply want to be able to walk away in a controlled manner, placing your Company into CVL is an alternative option to consider.
By placing your Company into CVL, you appoint an Insolvency Practitioner of your choice. This means that you have the opportunity to speak to the Insolvency Practitioner about the Company and its financial affairs, before the CVL process even begins and so that you can make sure you know exactly how the process will work and what to expect.
Once you have supplied the required information and following an initial Board Meeting to commence the CVL process it will typically take around 2-3 weeks (due to statutory notice periods) to hold a Meeting of Members at which point the Company formally goes into Liquidation (subject usually to no objection from creditors). During this time, we will write to all of your creditors to let them know that the CVL is going to take place and will prepare explanatory information outlining the financial position and explaining why the Company is entering CVL. Continuity of operation is potentially a problem with this route as there will have to be a break in trade between the Board and General meetings, which may have too much of an adverse impact on the business to warrant any new company purchasing the Company’s assets, from the appointed liquidator.
A Pre-pack is actually a specific form of Administration where a sale of all or part of business and assets is agreed prior to an Administrator formally being appointed. The sale of the business is pre-packaged which gives the process its name.
The primary benefit of a Pre-pack is that you are able to gain the same protection from legal action provided by Administration whilst also knowing that you have secured the buyback of those elements of your business that you are looking to save. A Pre-pack also ensures that your business can continue seamlessly throughout the Administration process.
Pre-pack Administration is often the best course of action if one or more of the following factors apply:
- Some or all of the underlying business is viable and there is a desire to rescue it;
- The value of the business would be damaged by any interruption to trade;
- Customer loyalty and the goodwill or intellectual property of the business is directly linked to its current Directors and management;
- The business has insufficient cash flow to enable an Administrator to trade the business whilst a third party buyer is sought.
If one or more of these factors apply to your business then it is likely that Pre-pack Administration will be a viable option. However, a Pre-pack Administration must not be used as a means to avoid properly marketing your business for sale on the open market gaining the benefit of retaining control of the business. Any appointed Administrator must consider his duty to creditors of the Company as a whole and therefore a sale back to the existing directors or associated company is likely to come under significant scrutiny.
Administration provides immediate protection from recovery action being taken by the Company creditors such as your suppliers or HMRC. This buys you time to determine the best strategy for you and the Company.
Whilst it can be a tough decision to choose to place your Company into Administration, the immediate protection provided often makes it by far the best way to save your business.
Appointing an Administrator
In most cases, the Administration process is started by the Directors filing a Notice of Intention to Appoint an Administrator. The Company’s members could move directly to file a notice of appointment of administrator if there is no floating charge holder requiring prior notification.
This form is a simple document that the proposed Administrator will arrange to complete and file at Court for you.
How Administration Works
When we have been appointed as Administrators we will seek to realise the Company’s assets. When doing this, we are required to obtain the best price we can for the Company’s assets as a whole. This will then result in a period of marketing of the Company’s assets (which could be up to 4 weeks). Immediately upon appointment, if the directors/new entity was willing to make an offer for the Company’s business it is suggested that this offer be brought to our attention as soon as possible. A best offer may not necessarily involve purely cash consideration, as we also have a duty to consider employee jobs (TUPE), the reduction of creditor claims (the honoring of any uncompleted work) and the agreement to provide warranties etc.
Once an offer is agreed with a purchaser the Administrator would appoint their own lawyer to draft the sale agreement, with the purchaser also advised to instruct separate lawyers to review the document and obtain their own advice.
Almost invariably the assets will have most value to you as its existing Directors as opposed to an external party as you know the business and have already worked hard to build it to its current form. Because of this, you may be best positioned to immediately offer to buy back the business and assets, free of the Company historic debts. Depending on the nature of the assets and the amount of money involved, should you be deemed the preferred bidder then our agent can usually agree a sensible payment term for the purchase.
Administration has the following benefits:
- Immediate protection from your Company’s creditors;
- All ongoing legal action is stopped;
- Trade can continue (under license in this case) whilst you assess your options and put together an offer;
- You get to choose the Administrator that you will work with;
- Provides the opportunity to restructure the business.
The sale of the Company’s business/assets does not in itself bring the Administration process to an end, it simply means that the agreed purchaser can proceed with trading using the Company’s business and assets. The Company (in Administration) will continue to exist for a period up to 12 months (longer if an extension is required) to enable the appointed administrator to fulfill their legal duties, these include the previously discussed directors conduct investigation and reporting process (also required in an insolvent liquidation) and dealing with creditor claims and potential distribution.