Struggling to pay back creditors or lenders is a common theme for many businesses who have been impacted by the pandemic. In part four of our companies in crisis Q&A series, senior litigation lawyer Alexander Neale explains the different options available to companies that are struggling to pay debts.
Key points
There are informal and formal steps that you can take to try to avoid insolvency or if that fails there are different arrangements available to suit you and your companies needs:
- Informal arrangement: Your company can discuss its position with creditors and come to an informal repayment arrangement and/or new terms to spread payments across a period that the company can afford.
- External finance: Your company can seek external finance to fund a particular difficult trading period, provided that the repayments are affordable.
- Sell your company: Your company can be sold as a going concern to an external third party.
- Creditors voluntary liquidation: This process is started by company shareholders and managed by a liquidator. If your company is placed into liquidation, the assets are realised and the proceeds distributed to the shareholders and creditors. Your company will be dissolved at the end of the liquidation.
- Compulsory liquidation: Also known as winding up, as company director you (or the company, a shareholder or creditor) start the process by filing a winding up petition at court. If a court is satisfied that your company cannot pay its debts when they are due, or are made insolvent, a winding up order will place the company into compulsory liquidation. The process is then managed by a liquidator and the assets of the company are realised and distributed to the company’s creditors.
- Administration: This process would usually be started by you, the company or a floating charge holder. An application for an administration order may also be made by a creditor. An insolvency practitioner is appointed as administrator to take control of the business and assets, with a view to achieving one of the statutory purposes of administration. Administration usually gives the company a chance to reorganise or realise assets and given them ‘statutory moratorium’ protection so creditors can’t enforce any claims.
- Receivership: An individual (known as a receiver) is appointed to take control of a certain asset of the company then sell the asset on behalf of the company. The most common types are fixed charge receivers (appointed by a fixed charge holder) and administrative receiver (appointed by the holder of a floating charge).
- Company voluntary arrangement: Your company would need to come to an agreement with its creditors to pay a proportion of the debts due. This is supervised by an insolvency practitioner and an arrangement can only be agreed provided if the majority (not all) of creditors agree to it. The agreement can also include future or contingent liabilities. Once agreed, this will bind all unsecured creditors.
To watch previous videos from our companies in crisis series, please click on the titles below.
- Part one: I am concerned for the future of my company because of Covid-19. What steps should I take?
- Part two: I have signed personal guarantees to my company’s lenders but what happens if the company then becomes insolvent?
- Part three: How can I tell if my company is insolvent?
- Part four: My company is receiving pressure from creditors but it can’t afford to pay what it owes. I think that my company is now insolvent, what options do I have?
- Part five: Should my company continue to trade if I know that it has no way of paying all its debts?
- Part six: If my company is placed into an insolvency process, how will this affect me?
- Part seven: What duties do I owe as a company director and do my duties change if the company becomes insolvent?
- Part eight: My company is due monies from several customers. What steps can I take?
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
