Facing severe financial distress is a daunting challenge for any company director. In England and Wales, there are three primary insolvency options to consider when debts become unmanageable for a company: Company Voluntary Arrangements (CVAs), administration, and liquidation. Each option works differently, with its own process and implications. It is helpful to understand the key differences between these routes, the scenarios where each is applicable, the step-by-step processes involved, what actions you as a business owner need to take and how a solicitor can support you throughout.
It’s important to seek advice and act promptly once your company is facing financial difficulties. Ignoring the warning signs can worsen the situation. In fact, directors who continue trading while insolvent could risk personal liability for company debts. By engaging a specialist insolvency solicitor early, you can explore the best course of action and potentially avoid more drastic outcomes.
Company Voluntary Arrangements (CVAs)
A CVA is essentially a deal between an insolvent company and its creditors to repay a portion of its debts, immediately or over time or all of its debts over a longer period of time. Unlike Liquidation, a CVA is a rescue plan: the company continues trading and the existing directors stay in control of day-to-day operations. The CVA plan, which might last several years, typically involves the company making affordable monthly payments or lump sums to creditors, sometimes after renegotiating terms. It’s a formal, legally binding agreement – once approved, all unsecured creditors are bound by its terms. Approval requires a vote by the creditors: at least 75% (by debt value) of those voting must agree to the proposal for it to take effect. This high threshold ensures that the plan has broad support from creditors. Directors often choose a CVA when the core business is viable, for instance, if cash flow problems or one-off setbacks have made the company temporarily unable to pay its bills, but with breathing space it could recover.
Common scenarios for a business to need a CVA include being behind on tax payments, facing aggressive creditor action, or suffering cashflow issues due to a difficult trading period. If creditors stand to gain more from the company’s continued trading than from its liquidation, they are often willing to agree to a CVA. A CVA lets the business avoid the public stigma of administration or liquidation and preserves the company’s goodwill. Crucially, it protects the company from most existing creditor enforcement actions once in place, so long as the company adheres to the agreed repayments.
The CVA process: The typical process for implementing a CVA involves several key steps:
- Engage a licensed insolvency practitioner (IP): The directors contact an IP to review the company’s finances and viability. The IP, often called the nominee at this stage, works with management to formulate a CVA proposal with detailed financial forecasts. During this period, the directors generally continue to run the business as normal, but with an eye to restructuring and cost-cutting where possible.
- Draft the CVA proposal: The proposal sets out how much the company can afford to pay creditors and on what schedule (e.g. monthly payments over 3–5 years), and whether any debts will be written down. Directors, with the IP’s guidance, may negotiate informally with major creditors to ensure the plan is acceptable. The IP must vet the plan to ensure it is fair and feasible for all parties before proceeding.
- File and circulate the proposal: The finalised CVA proposal is filed at court and sent out to all creditors entitled to vote. Shareholders usually hold a meeting to approve the CVA as well, but this is generally a formality if the directors/shareholders agree on the plan. Creditors must be given time to consider the plan, typically at least two to three weeks before making a decision.
- Creditor vote: The IP will organise a creditor decision process, often via a virtual meeting or voting by correspondence. For the CVA to be approved, at least 75% (by value of debt) of the creditors who vote must vote in favour. If the proposal achieves this majority, it becomes binding on all unsecured creditors, even those who voted against or did not vote. If the threshold isn’t met, the CVA fails – in which case the company may have to consider administration or liquidation next. Modifications can be negotiated to the CVA to achieve a successful vote.
- Implementation and supervision: Once approved, the CVA is overseen by the IP, who becomes the CVA Supervisor. The company must adhere to the repayment schedule and other terms agreed upon. You, as the business owner, continue running the company and making the regular payments to the IP, who distributes funds to creditors. The company is expected to stay current on new obligations to avoid breaching the CVA. The CVA typically lasts until the agreed payments are completed, after which the remaining debt (if any was to be written off) is forgiven and the company exits the CVA.
- Breach: If any of the terms of the CVA are breached then the terms of most CVAs will require that the Supervisor retains funds from the initial payments to pay to wind up the company.
What should the business owner do? If pursuing a CVA, your role is to drive the turnaround plan. You’ll need to work closely with the IP, providing full access to financial records and helping develop a realistic proposal that creditors can support. Expect to prepare a detailed statement of affairs (listing assets, debts, and cash flow projections) and be candid about the company’s difficulties and recovery strategy. Once the CVA is in place, disciplined execution is key – you must ensure the agreed monthly contributions are paid on time and keep the business on a stable footing. It’s equally important to maintain open communication with the IP and promptly address any issues that arise during the repayment period.
Role of a solicitor: A solicitor plays a valuable supporting role during a CVA. They can advise on the suitability of a CVA compared to other insolvency routes, helping you understand the legal implications of the arrangement. If a CVA is chosen, your solicitor can assist in drafting or reviewing the CVA proposal to make sure the terms (and any complex clauses) are clear, fair, and compliant with insolvency law. Solicitors often help negotiate with key creditors – for example, landlords or banks – especially if there are critical contracts or leases involved that need adjustment as part of the deal. During the creditors’ decision process, a solicitor will ensure that proper procedures are followed and can represent the company in any legal challenge. Having a solicitor’s guidance means you have an expert to explain your obligations under the CVA, help you stick to them, and liaise with the IP on legal matters – allowing you to focus on running the business under the new plan.
Administration
Administration is another formal insolvency option aimed at rescuing a company or, if rescue isn’t possible, achieving a better outcome for creditors than an immediate shutdown. When a company goes into administration, an licensed administrator (who must be an IP) is appointed and takes over the management of the company. The goal is to use the administrator’s expertise to stabilise the situation and protect the business from creditor actions while a plan is developed. In fact, as soon as a company enters administration, it gains legal protection called a moratorium, during this period no legal action can be taken against the company or its assets without the administrator’s or court’s consent. This gives breathing room to either restructure the business or sell it as a going concern. Administration is often suitable for companies under acute financial pressure that need immediate relief from creditor threats and have a business that might be saved in whole or part. Unlike a CVA, in administration, the directors lose control and the administrator makes the decisions to try to rescue the company or maximise creditor returns. However, administration can sometimes preserve the business or at least its profitable parts by restructuring the company or finding a buyer, whereas liquidation would simply shut it down.
When to consider administration: Administration is appropriate when a company is insolvent but has a chance of survival or at least has valuable elements that could be sold. The law sets out three objectives an administrator will consider:
1) rescuing the company as a going concern,
2) if not, achieving a better result for creditors than straight liquidation would, or
3) if neither of those is feasible, selling assets to repay secured or preferential creditors before closing the company.
Directors typically choose administration if they need urgent protection from creditors, for instance, if a major creditor is about to obtain a court judgment or if the next payroll can’t be met without intervention. Administration is also a common route if a company needs to be sold quickly; a “pre-pack” administration can line up a buyer in advance so that the business is sold immediately once the administrator is appointed, minimising disruption. It’s worth noting that administration is a temporary state, and it may or may not end with the company continuing. Some administrations lead to a CVA or a sale after which the original company might be dissolved, while others end in liquidation if rescue isn’t achievable.
The administration process: The process of putting a company into administration can be swift compared to other options. Here are the key steps:
- Initiating administration: An administrator can be appointed in a few ways. In many cases, the directors initiate the process by filing a notice of intention to appoint an administrator with the court. This filing gives the company an interim 10-business-day moratorium (legal breathing space). The actual appointment can often be made out of court by filing the necessary statutory forms if done by the company, its directors, or a qualifying floating charge-holder (typically a bank). Alternatively, a debenture holder can appoint an administrator directly. Lastly, creditors can seek a court order to force a company into administration, though in practice, a creditor is more likely to petition for liquidation unless administration would clearly yield a better outcome.
- Administrator takes control: Once appointed, the administrator officially takes charge of the company. The appointment is announced to all creditors and publicly advertised. The directors’ powers are suspended, though they are required to cooperate fully with the administrator. If the business is to be sold as a going concern then the administrator will continue to trade the company but if that is not an option the administrator can cease trading in whole or in part and sell off the assets. All the while, the legal moratorium means creditors cannot repossess assets or start/continue legal claims against the company without permission.
- Assessment and proposal: The administrator’s job in the first several weeks is to assess the company’s financial position and decide on the best strategy to maximise returns for creditors. Within 8 weeks of the start of administration, the administrator must send creditors a statement of proposals – a document explaining what they plan to do. Creditors get to vote on the administrator’s proposals, usually via a decision procedure or meeting called by the administrator. In practice, if the proposal is straightforward and creditors are mostly getting paid from asset sales, this may be a formality. The proposals will align with one of the objectives of administration, often the plan might be to negotiate a CVA, sell the business as a going concern, or if neither is possible, to liquidate the company’s assets and distribute the proceeds. In a “pre-pack” situation everything will have been planned before the entry into administration and a buyer identified so that the sale will be completed immediately that the administrator is appointed.
- Implementation and outcome: After creditor approval, the administrator proceeds to implement the plan. If the plan is to sell the business, they will negotiate and complete that sale. If the plan is a restructuring (like a CVA or finding new investment), the administrator oversees that process, during which time the company may continue to trade under their supervision. Throughout the administration, the administrator reports to creditors on progress. An administration can end in several ways: the company could exit administration by being handed back to the directors if rescued, it might move into a CVA, it could be sold and then the shell of the company put into liquidation, or it might simply be liquidated if rescue efforts fail or simply dissolved.
What should the business owner do? If you decide to put your company into administration, there are a few key actions you’ll need to take. First, you should consult with an IP or solicitor to confirm that administration is the right option. There are costs and qualifying criteria to consider, and a professional will advise if another route fits better. Once the decision is made, as a director, you will typically be involved in the paperwork to appoint the administrator. This might involve signing documents like a notice of intention to appoint and a statutory declaration, which a solicitor can prepare. After filing, the critical action is to cooperate and communicate. You must hand over the reins to the administrator once they’re appointed, providing them access to all company information and assets. It’s normal to feel a loss of control here, but remember the administrator’s role is to act in the creditors’ best interests, which often aligns with saving parts of the business. You should support the administrator by informing employees and stakeholders of the situation as advised, and by staying available to answer questions about the business operations. During administration, you’ll step back from decision-making; your duty is to assist the process. Importantly, do not attempt to hide assets or favour certain creditors. The administrator will review past transactions, and any misconduct can be challenged. By being transparent and helpful, you increase the chances of a better outcome and demonstrate that you’ve fulfilled your responsibilities.
Role of a solicitor: A solicitor’s support during administration is vital at several stages. Before entering administration, a solicitor can help you weigh this option against others, since administration can be complex. They will explain the implications – for example, that you relinquish control of the company – and ensure you understand directors’ duties at the brink of insolvency. When initiating the process, your solicitor can prepare and file the legal documents needed to appoint an administrator or apply to court, if necessary, making sure all technical requirements are met so that the moratorium and appointment take effect properly. During the administration itself, your solicitor can act as your liaison and advisor: they will keep you informed of the administrator’s proposals and actions and can review those proposals with you to protect your interests. If you as a director, are considering buying back part of the business, your solicitor would handle negotiations and contracts on your behalf. If there are court hearings, the solicitor will represent the company’s or your position. Additionally, a solicitor will advise you on personal exposure as administration does not erase personal guarantees you may have signed. They can help negotiate with banks or landlords regarding those guarantees. They will also advise you on how to with any accusation of wrongful trading or breach of duty prior to the administration.
Liquidation
Liquidation is the insolvency process that results in a company being wound up and ultimately dissolved. In a liquidation, the company’s assets are sold off and the proceeds distributed to creditors in a strict legal order of priority. Once liquidation begins, the business effectively ceases trading, and the company will not continue as a going concern. This is considered the option of last resort when a business cannot be saved or when directors decide that closure is the only viable path. Unlike a CVA or administration, liquidation means no rescue or continuation – the end goal is to close the company down and settle debts as far as possible. In England and Wales, there are two main types of insolvent liquidation:
Creditors’ Voluntary Liquidation (CVL), which is initiated by the company’s directors/shareholders, and Compulsory Liquidation, which is court-ordered, usually at the request of a creditor. In either case, an IP acts as liquidator and takes control of the company from the directors. Liquidation is typically appropriate when the company is insolvent with no realistic prospect of turnaround, for example, it has stopped paying debts, has little or no cash flow, and no credible plan can be made to restore viability. It may also follow a failed attempt at a CVA or an administration that didn’t find a buyer.
When is liquidation the right option? Liquidation is usually chosen or forced when continuing to trade is more harmful than closing down. Directors might opt for a voluntary liquidation if the company cannot pay its debts and they wish to handle the wind-up in an orderly manner, as opposed to waiting for a creditor to force the issue. Warning signs include being unable to meet payroll, creditors threatening legal action or already having obtained judgments, the company’s liabilities far exceeding its assets, and no available source of rescue financing. In such cases, prolonging trading could deepen creditor losses and increase the directors’ risk of personal liability. By liquidating, the company’s remaining value is distributed fairly to creditors, and although the business ends, it can draw a line under the debts. From the creditors’ perspective, if they have lost confidence that the business can recover, liquidation ensures that whatever assets remain are not further depleted.
The liquidation process (Creditors’ Voluntary Liquidation): If you, as a director, decide on voluntary liquidation, the process usually unfolds as follows:
- Shareholder resolution to wind up: The directors must resolve to wind up the company, nominate an IP and must call a general meeting of shareholders and a meeting of creditors. A special resolution is proposed to wind up the company. By law, at least 75% of the shareholders who vote must agree for the liquidation to proceed. In small companies, directors and shareholders are often the same people, so this may be straightforward. Once this resolution is passed, the company is officially in liquidation.
- Appointing a liquidator (insolvency practitioner): The creditors’ meeting will either approve the choice of IP or appoint their own choice.. The liquidator takes charge of the company from this point, the liquidator now has control, and the directors’ powers cease. to the directors are obliged to assist the liquidator. The liquidator will notify Companies House and advertise the liquidation in The Gazette, so the liquidation becomes public. Creditors are also informed; modern insolvency rules often use a “deemed consent” procedure or a virtual creditors’ meeting to confirm the liquidator’s appointment and allow creditors to ask any questions about the process.
- Ceasing trading and asset collection: In a liquidation, the company typically stops trading immediately (if it hasn’t already). The liquidator’s primary task is to collect and sell the company’s assets. This can include stock, equipment, vehicles, property, as well as chasing any debts owed to the company by customers. The liquidator may also terminate contracts and leases. Employees are usually laid off, with outstanding wages or redundancy claims becoming creditor claims (employees have preferential status for some of their unpaid wages/holiday and certain pensions and may recover some losses from the Government). Any ongoing projects or services provided by the company will come to an end unless a third party steps in to take them over. Essentially, the business is dismantled so that its value can be turned into cash.
- Distribution to creditors: The liquidator converts all assets to cash, a process which can take months, or longer for complex businesses, and distributes the money to creditors in the order set by law. The order of priority generally is: secured creditors with fixed charges (who may simply repossess their collateral), costs of the liquidation, preferential creditors (certain employee claims and since late 2020, certain tax debts), secured creditors with floating charges, unsecured creditors, and finally shareholders. In an insolvent liquidation, unsecured creditors often receive only a small dividend, and shareholders typically get nothing. The liquidator will communicate to creditors how much they can expect to recover.
- Investigation and closure: An important part of the liquidator’s role is to examine the company’s affairs and the conduct of its directors leading up to insolvency. The liquidator reviews financial records and transactions; if they find that directors have, for example, wrongfully diverted assets, preferred certain creditors improperly, or traded recklessly, they have a duty to take action. As a director, you will be asked to cooperate and provide information such as a statement of affairs detailing assets and liabilities. Once all realisations are complete and funds distributed, the liquidator will call final meetings, issue a final report, and arrange for the company to be dissolved. Any remaining debt that couldn’t be paid off is written off from the company’s perspective, although if you have personally guaranteed any of those debts, the creditor can pursue you under that guarantee even after the company’s liquidation.
What should the directors do? In a voluntary liquidation, your key actions are to initiate and facilitate the wind-up in an orderly fashion. First, you’ll engage an IP for advice, they will confirm if the company is insolvent and help convene the necessary shareholder meeting. You must ensure corporate formalities are followed, sending out notices to shareholders in time, drafting the winding-up resolution, etc., often with professional help. Once the liquidation is underway, your role shifts to one of full cooperation: hand over the company’s books, records, passwords, and assets to the liquidator. It’s crucial to be honest and thorough in disclosing all assets and recent company transactions. You will likely need to prepare a statement of affairs for the creditors. Also, you should cease all trading activities and not make any payments to creditors on your own. If creditors or employees contact you, direct them to the liquidator for information. As a director, you also have to attend meetings or calls as requested by the liquidator and answer any queries about the business. While it may be a difficult time, acting with integrity and transparency will make the process smoother. Remember, a key reason to opt for voluntary liquidation is to minimise harm – by taking these actions, you help protect creditors’ interests and fulfil your legal duties, hopefully avoiding allegations of misconduct.
Role of a solicitor: During liquidation, a solicitor’s help is particularly useful to ensure everything is done correctly and to safeguard your interests where possible. At the start, a solicitor can advise if liquidation is truly the right step or if there’s an alternative. If liquidation is chosen, your solicitor can assist in the practicalities of calling the shareholder meeting and drafting the resolutions and minutes in the proper legal form. They’ll make sure that the insolvency notification procedures are properly handled in cooperation with the IP. Importantly, a solicitor will brief you on what to expect once the liquidator takes over, including your obligation to cooperate and the investigation into director conduct. If there are complex assets or contracts to be dealt with say, properties on lease or disputes in progress, the solicitor can liaise with the liquidator to clarify how those should be handled. In cases of compulsory liquidation, a solicitor’s role might shift to representing the company or you as a director in court proceedings. Throughout the liquidation, if the liquidator raises any claims or questions about your actions as a director, you should have a solicitor ready to advise or defend you. For instance, should the liquidator allege wrongful trading or seek to recover payments you made before liquidation, your solicitor will be the one to respond on your behalf, present your evidence and navigate any legal settlements. A specialist insolvency solicitor is often essential to assist in navigating what is often a complex and distressing time.
Choosing the Right Option and Next Steps
Every insolvency situation is unique, and choosing among a CVA, administration, or liquidation depends on the company’s specific circumstances. As a director, it’s your duty to consider the interests of creditors once insolvency looms. This means you shouldn’t delay seeking help. Engage with a specialist insolvency solicitor and an IP to discuss your company’s financial state. These professionals will help assess which option aligns best with your situation, for example, whether the business could be saved or whether shutting down is unavoidable. Remember that you are not alone in this process. A solicitor will guide you through the legal process, while an IP will handle the formal proceedings and creditor relations. The support of a solicitor is especially valuable in making sure you follow the correct steps and that you are protected throughout. They can also coordinate with other experts, such as tax advisors, if needed during the process.
Ready to take the next step with DTM Legal on your side? Contact Richard Thomas and the Business Recovery & Insolvency team by calling 01244 354 801 or emailing richard.thomas@dtmlegal.com.
