2021 has been a challenging year for the economy, and there’s still a long way left to go. The effects of the ongoing pandemic, combined with political and economic uncertainty, and the challenges of Brexit have ensured that the UK is struggling to emerge from the worst recession in centuries.
For many businesses, large and small, the threat of corporate insolvency is very real. Some industries have been harder hit than others (hospitality and tourism, for instance), but generally speaking it’s been a bad year all around.
While things are slowly looking up, companies need to assess their financial situation and prepare for potential corporate insolvency. Acting fast through corporate reconstruction plans or agreements such as a company voluntary arrangement can help to minimise the effects of insolvency and save a company from liquidation.
With that in mind, we take a look at corporate insolvency options available in 2021.
What Is Corporate Insolvency?
Corporate insolvency occurs when a company can no longer pay its debts. A company becomes insolvent when they have more money going out, than coming in – the books are in the red and the balance sheet is far from balanced.
It can happen for a number of reasons, including bad management decisions, poor planning or forecasting, or simply a lack of business. Unfortunately, COVID-19 has already caused a vast number of insolvencies across the UK – an unprecedented scenario in which businesses have had little control over their situation.
Corporate insolvency can lead to complete liquidation, but just because a company becomes insolvent doesn’t mean it’s the end. There are still ways to turn a business around, through corporate reconstruction and informal or formal insolvency arrangements.
Which Sectors Have Been Mostly Hit by the Pandemic?
The number of insolvencies has increased massively since COVID-19, but the distribution of these insolvencies has not been equal. Due to the nature of lockdowns and the pandemic, particular industries and sectors have been harder hit than others.
The hardest-hit industries are those that traditionally have conducted face-to-face trading and therefore have been unable to continue operating or unable to adapt to remote life. Restaurants have closed, pubs have shut their doors forever, and the high street is empty.
The hardest-hit sectors are hospitality, travel and tourism, events, and retail. Many other sectors have struggled too, while the businesses that have survived have changed quickly to meet the demands of locked-down customers.
Informal Insolvency Arrangements
For businesses that are facing corporate insolvency, it is possible to come to an informal insolvency arrangement.
When businesses are unable to continue paying debts, their creditors soon start asking for their money. But before things escalate, an informal insolvency arrangement can help to buy time and slow the process down.
An informal agreement is simply an arrangement between the debtor and creditor. The company can ask for more time to pay off the debt, or ask for interest rates to be halted on a loan for a specified period of time.
Informal insolvency arrangements involve the interested parties only. There are no lawyers and no legal documentation is required, although companies can seek professional advice from an insolvency practitioner.
Informal insolvency arrangements can only be arranged if both sides are able to co-operate and come to an agreement. They can be risky of course, because there’s no legal backing behind these agreements, and one side may simply renege on the deal if it’s not working in their favour. If there are multiple creditors, an informal agreement is even more complicated.
Formal Insolvency Arrangements
Formal insolvency arrangements are the standardised approach to dealing with creditors. These are legally binding agreements that must be implemented by a registered insolvency practitioner.
There are several different types of formal insolvency arrangement, some of which are voluntary and some of which can be pursued by creditors against the insolvent company.
The most common formal insolvency arrangements include the following:
- Company voluntary arrangement (CVA)
- Liquidation (including voluntary or forced liquidation)
Let’s take a look at these formal arrangements in more detail.
When an insolvent company enters into administration they are placing management of the business into the hands of an outside administrator (usually an insolvency practitioner). The administrator continues to run the business but is protected from creditors, which provides an opportunity for corporate reconstruction and for the business to be saved.
Administrators may have to make tough decisions, such as dissolving or merging departments or selling parts of the business, but their ultimate aim is to save the company from liquidation so it can become profitable again in the future.
Company Voluntary Arrangement (CVA)
A company voluntary arrangement, or CVA, is a formal agreement between the insolvent company and its creditors. A CVA must be administered by an insolvency practitioner and agreed upon by a majority of the parties involved.
A CVA allows for debts to be reorganised and payments to be rescheduled, buying time for a company to be turned around and reconstructed along profitable lines. A CVA has the capacity to help businesses avoid liquidation by improving (and often consolidating) their financial position with creditors.
If all other arrangements – informal or formal – fail to turn the business around, then the only option remaining is liquidation. When liquidation occurs, a company’s assets are sold off in order to attempt to raise funds to pay its creditors.
There are several different types of liquidation, however:
- Company voluntary liquidation (CVL) – the business winds down voluntarily, agreeing to sales of assets and attempting a smooth closure.
- Members voluntary liquidation (MVL) – occurs before insolvency, when the company can pay its debts. Allows the company to be wound down while it’s still profitable.
- Compulsory liquidation – creditors petition the courts for a forced closing of a business and sale of its assets. The worst-case scenario when no agreements can be reached.
Contact Irwin Insolvency Today for Your Free Consultation
With decades of experience dealing with insolvency matters, our licensed insolvency practitioners can offer impartial advice to help your business through these tough times. If your business is struggling financially, don’t hesitate to contact Irwin Insolvency for your free, no-obligation consultation.