In times of financial distress, companies often face the daunting prospect of liquidation. However, it is important to note that liquidation is not the only path available.
There are several alternatives that businesses can explore before resorting to such drastic measures. This article aims to shed light on the various alternatives to company liquidation, providing insights into the different options that exist.
Liquidation is often seen as the default solution when a company faces financial distress. It is crucial to understand that liquidation is not a one-size-fits-all approach.
While it may be suitable for some businesses, it can have far-reaching consequences that may not align with the goals and circumstances of others.
It may be appropriate in cases where the business is no longer viable or when stakeholders believe it is the most beneficial option. However, for businesses with potential for recovery, exploring alternative options before resorting to liquidation can open up possibilities for restructuring, securing financing, or entering into voluntary arrangements.
Understanding that liquidation is not the only choice allows businesses to explore alternatives that may better align with their objectives and provide a chance for survival and future growth.
What are the alternatives to company liquidation?
There are a number of alternative to liquidating a company these include:
Company Voluntary Arrangement
A Company Voluntary Arrangement can serve as a compelling alternative to liquidation for businesses facing financial distress. A CVA is a legally binding agreement between a company and its creditors, allowing the company to restructure its debts and continue trading. Through a CVA, the business proposes a repayment plan to its creditors, outlining how it intends to repay a portion of the outstanding debts over an agreed period.
This arrangement offers several benefits, such as providing breathing space to the company, enabling it to focus on restructuring and improving its financial position. It also allows the company to maintain its relationships with suppliers and customers, preserving its reputation and potentially facilitating its recovery.
A CVA can be a lifeline for businesses that have the potential to overcome their financial challenges and avoid the drastic measure of liquidation, giving them an opportunity to restructure their debts and emerge as a stronger, more sustainable entity.
CVA moratorium
A CVA moratorium refers to a temporary period during which a company undergoing a Company Voluntary Arrangement is granted protection from creditor actions. Within this timeframe, except for certain defined exceptions, creditors are prohibited from taking legal actions against the company.
Typically, the moratorium lasts for 28 days, during which the court assesses the eligibility of the company for a CVA. This essential measure provides breathing space for the company to negotiate and implement a restructuring plan, aiming to avoid insolvency and reach a more sustainable financial position.
Administrative Receivership
Administrative Receivership is a legal process that can be an alternative to company liquidation for financially distressed businesses. It involves the appointment of a licensed insolvency practitioner as an Administrative Receiver to take control of the company’s assets on behalf of secured creditors. The primary objective of an Administrative Receiver is to recover and realize the assets to repay the secured creditors.
This process typically occurs when a company has defaulted on a secured loan, and the lender has the power to appoint an Administrative Receiver under the terms of the security agreement e.g. holds a fixed and floating charge. While the focus of Administrative Receivership is on satisfying the claims of secured creditors, it can also provide an opportunity for the business to be sold as a going concern, potentially preserving jobs and allowing the company to continue operating.
However, it is important to note that Administrative Receivership is a relatively rare insolvency procedure in many jurisdictions, as other alternatives, such as administration or voluntary arrangements, are often preferred due to their broader objectives of rescuing and restructuring the business.
Company Administration
Company administration is a formal insolvency process designed to provide a viable alternative to liquidation for financially distressed businesses. It involves the appointment of an administrator, typically a licensed insolvency practitioner, to take control of the company’s affairs. The administrator’s primary goal is to achieve one of three objectives: rescuing the company as a going concern, achieving a better result for creditors than immediate liquidation, or realizing the company’s assets to repay secured or preferential creditors.
During the administration process, the company benefits from a moratorium, which provides protection from legal actions by creditors, allowing the administrator to assess the business, explore restructuring options, and negotiate with stakeholders. This process offers a chance for the company to reorganise its operations, secure new investment, renegotiate contracts, or arrange a sale of the business, potentially leading to its survival and ongoing operations.
The administration process is a flexible and powerful tool that allows distressed companies to navigate financial difficulties and strive for a positive outcome, while minimising the negative impact on employees, suppliers, and other stakeholders.
Company Dissolution
Company dissolution can serve as an alternative to liquidation when a company does not have any outstanding debts or liabilities. Dissolution is the process of formally closing down a company, removing it from the register of active businesses. It is a straightforward and cost-effective method to wind up a company’s affairs, particularly when there are no creditors to satisfy or assets to distribute.
Dissolution can be an appropriate option for businesses that have fulfilled their objectives, reached the end of their lifecycle, or decided to cease operations. By choosing dissolution over liquidation, companies can avoid the complexities and formalities associated with a formal insolvency process.
It provides a streamlined and efficient means to close the company’s operations, terminate legal obligations, and distribute any remaining assets among shareholders. However, it is crucial to ensure that all legal and regulatory requirements are fulfilled before proceeding with dissolution to avoid potential complications or liabilities in the future.
Company Restructuring
Company dissolution can serve as an alternative when a company does not have any outstanding debts or liabilities. Dissolution is the process of formally closing down a company, removing it from the register of active businesses. It is a straightforward and cost-effective method to wind up a company’s affairs, particularly when there are no creditors to satisfy or assets to distribute. Dissolution can be an appropriate option for businesses that have fulfilled their objectives, reached the end of their lifecycle, or decided to cease operations.
By choosing dissolution over liquidation, companies can avoid the complexities and formalities associated with a formal insolvency process. It provides a streamlined and efficient means to close the company’s operations, terminate legal obligations, and distribute any remaining assets among shareholders.
It is crucial to ensure that all legal and regulatory requirements are fulfilled before proceeding with dissolution to avoid potential complications or liabilities in the future.
Seek external Investment
Seeking external investment is a viable alternative to company liquidation when a business is facing financial distress. By attracting new investors, securing loans, or forming partnerships or joint ventures, companies can inject much-needed capital into their operations.
External investment not only provides immediate liquidity but can also bring valuable expertise, resources, and networks to support the business’s turnaround efforts. It can enable companies to fund necessary restructuring initiatives, invest in new technologies or markets, or strengthen their competitive position.
By exploring external investment options, businesses have the potential to revitalise their operations, regain financial stability, and avoid the drastic step of liquidation.
Frequently asked questions
The best alternative for liquidation is company administration is another rescue/restructure measure, and potential alternative to insolvent liquidation. Administration is particularly valuable for businesses experiencing unrelenting creditor pressure, as it provides an eight-week moratorium on creditor legal action.
Alternatives to liquidation offer opportunities for businesses to restructure, secure financing, or negotiate with creditors, allowing them to overcome financial distress. These alternatives can potentially preserve jobs, maintain relationships with suppliers and customers, and position the company for future growth and success. By exploring alternatives, businesses have a chance to avoid the permanent closure and asset liquidation that come with traditional liquidation processes. What is the best alternative for liquidation?
Why consider alternatives to liquidation?
Conclusion
In conclusion, when a business faces financial distress, alternatives to company liquidation provide avenues for potential recovery and long-term viability. Restructuring offers the opportunity to review and adjust operations, finances, and organizational structure, enabling the company to restore profitability.
Seeking external investment brings fresh capital, expertise, and resources that can support the company’s turnaround efforts. Voluntary arrangements, such as CVAs, allow for structured debt restructuring, providing breathing space for the business to meet its obligations while continuing operations.
Additionally, other insolvency procedures like company administration or administrative receivership may be considered in specific situations to achieve better outcomes for creditors or secure the company’s assets.
By exploring these alternatives, businesses can navigate financial challenges, preserve jobs, maintain relationships, and position themselves for future growth and success, ultimately avoiding the irreversible consequences of liquidation.
Still unsure which alternative is right for your company, complete an online enquiry and one of our team will advise you the best route to choose for your company.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.