Finance: COVID-19 and companies in financial distress - part two
In part two of her blog, lecturer and TC Finance Subject Controller Eleanor Poole CA explores options a company can take when they are in financial distress, linking these to content in the TC Finance course.
In part one, we discussed routes a company in financial distress could take, which included CVAs and administration orders. We used these as a way to turn the business around, if we could see a light at the end of the tunnel.
But what if we can’t turn this business around?
If we believe that the business can’t be turned around, then we need to consider bring the company to an end. There are a few ways we can do this – here, we’ll discuss a creditors’ voluntary liquidation and a winding up by the courts.
Creditors’ voluntary liquidation
At first glance, it may seem that the name ‘creditors’ voluntary liquidation’ (or CVA) means that this is the route that creditors take to wind up a company, but here, this method of winding up a company is actually initiated by the company itself.
The creditors referred to in the name here relate to the fact that it is the creditors who decide on the liquidator who will put through the liquidation. The liquidators will perform all the administration work necessary to bring the company to the end of its life.
Creditors may prefer a more expensive liquidator, as this may ensure that they receive even more money in the winding up of the company. Some creditors may prefer a cheaper liquidator, so that the funds of the company being wound up aren’t heavily reduced by expensive liquidators’ fees.
Winding up by the court
If a creditor has reached the end of their tether, then a winding up by the court procedure can be initiated to bring about an end to the company’s life, hopefully ensuring full repayment of your debt. The creditor will submit a proposal to the courts detailing the outstanding debt and how long it has been outstanding, with the courts then deciding whether to proceed with the winding up.
This procedure can be used when you have £750 or more of a debt outstanding. In practise, this can be used as a ‘scare tactic’, to encourage delinquent companies to pay any outstanding debts.
Combinations of procedures
We can use a number of these procedures for each company; using one doesn’t preclude the use of another. A company could try to placate creditors with a CVA, then enter into administration if that offer didn’t work. If the administrator was unable to turn the company around, then they could enter into a creditors’ voluntary liquidation.