Decide whether an insolvency process is necessary for the company The earlier the company identifies and addresses the issues, the wider the range of options available to rectify them. The options set out below begin with the least intrusive to the company and end with the most intrusive, and should be incorporated into any strategy the company is undertaking (see points 8 & 9 on page 4). If decisions are delayed, it’s likely that the least intrusive options will cease to be available.
Restructuring plan (RP)
Trade on or through the financial issues
Moratorium
Members’ Voluntary Liquidation (MVL)
The RP is another option that was enacted in 2020. As with the CVA (see below), an RP can take place with or without a prior moratorium. The RP can achieve similar results to a CVA (and a Scheme of Arrangement) but has an important advantage that the court can order ‘cross-class cram down’, imposing acceptance of the RP on a class of creditors even if they do not agree to it. The RP is still relatively rare, and whilst the size of business seeking RPs is reducing, they are still a relatively expensive solution to implement. Directors remain in control of the company.
It may be that you have identified that the issues were temporary, or you have addressed them at an early stage. You forecast that any financial stress is temporary or will reverse in the short to medium term and you have sufficient funding in place to bridge the company to a position of improved financial performance. If you are confident that underlying performance is now profitable you may consider a cash injection to support the company’s finances. However, you should always take professional advice before making such a cash injection and consider taking security over the company before funds are introduced.
This is a process that was enacted in 2020 to provide additional protection to viable businesses. The process acknowledges that financial distress can absorb significant management time, and the moratorium therefore affords a company twenty business days of breathing space to investigate the rescue and restructuring options for the company. The moratorium can be extended further to enable any rescue plans to run their course. Directors remain in control of the company, and a licensed insolvency practitioner will act as a monitor to ensure that the rescue of the company remains a realistic prospect.
Where you determine that cessation of trade is appropriate, and the company is still solvent, an MVL is a cost-effective and often tax-efficient way of extracting value for shareholders.
Scheme of Arrangement
A scheme is a compromise or arrangement between a company and its members or creditors that requires two applications to court. In practice, due to the costs and complexities involved, schemes tend to be reserved for larger entities.
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