A company is called insolvent when it has reached a stage wherein it can no longer fulfill its debts as they mature. Here, the business liabilities over exceed its assets and its cash outflows tower over its cash inflows. This is brought about by several factors both internal and external to the entity such as but not limited to decline in economy, change in customer preferences, drastic decline in sales and mismanagement of corporate assets. Such can be inferred after a meticulous study and examination of the company’s books and operations. There are several business recovery options for insolvent companies. Let’s discuss some of them here.
THE ADMINISTRATION – Here, an insolvency practitioner will be tasked to control the business. This is a re-organization or re-structuring procedure that formulate for the rescue of the business, maximizes asset realization and seeks to find other options for a turnaround.
THE PRE-PACK – Also a restructuring type of business recovery option, the pre-pack is the sale of the entire company or part of it as it seeks to run the business under new management and additionally acquire cash to pay for its debts. This method strengthens the going concern for the organization and allows it to continue operations. In essence, this method does not cease or halt trade.
THE VOLUNTARY ARRANGEMENT – In this option, the business formally agrees with its creditors to allow it to trade in order to provide fund to repay its debt at an agreed interest rate and for a period of as long as five years. It will require at least a seventy five percentage of vote from the creditors for such agreement to be valid and binding.
THE VOLUNTARY LIQUIDATION – More commonly referred to as a CVL which stands for a creditors’ voluntary liquidation, this method puts the business to a formal close where it sells all of its assets and distributes its proceeds to the corporate creditors and to fulfill any other remaining obligations for example to its employees. The distribution to the creditors is allocated in proportion so there is a possibility for them to be not paid in full. Should that happen, a CVL will legally pardon any unpaid debts after distribution.
When it comes to business recovery options, it is essential for companies and business owners to carefully weigh down which option benefits them the most. Insolvency is a serious matter and a lack of action might bring up a winding up petition which nobody wants.
What is a forced or compulsory liquidation and winding up petitions? It really sounds bad but is it really? Take a look and get to know how such can affect your company, its consequences and what you can do to avoid one.
A forced or compulsory liquidation can be brought about by a winding up petition brought upon by the corporate creditors. This happens when the said creditors have exhausted all other means to collect payment which is due from the company. This can mean late payments, contract beaches, bounced checks and the like. Since this process can be costly to the corporate creditors, it is mostly only done where one, they can recover a considerable amount that outweighs the costs and two they have tried all other options to enforce collection.
Such petition is brought up to court who in turn releases an order to force the company to liquidate all its assets and distribute its proceeds to its creditors. What other consequences or effect does it bring the company aside from the obvious cessation of business?
CONSEQUENCE # 1: It strips the directors of power and control over assets. The company does not even get to choose the liquidator. The court or the creditors do. Any sale of assets will be reverted and invalidated.
CONSEQUENCE # 2: It can extend directors’ liability up to their personal assets if proven that they have failed to do their responsibility of putting creditor interest above their own gains.
CONSEQUENCE # 3: It tarnishes the brand image. It puts the company at critical public scrutiny and gives it a bad reputation as someone who does not pay off their dues.
CONSEQUENCE # 4: Bank accounts will be frozen. This is to prevent the company from undertaking transactions that can worsen its state and from allegedly escaping their liabilities. Should the court allow continued operations, these are to be undertaken only so as to aid in the winding up of the business and will be heavily monitored.
So what can one do? If the company has already concluded its state of insolvency then it has to file a CVL which is a voluntary liquidation for insolvent entities. This is better than to wait out for a winding up petition or compulsory liquidation and suffer the consequences. At times, bowing out gracefully is the best solution. But in other cases, some business recovery options can work to such as restructuring and mergers and acquisitions to name a few.
You many have already heard about liquidations and know its kinds the voluntary ones (creditors’ voluntary liquidation and members’ voluntary liquidation) and the compulsory one (winding up petition). Liquidations happen when the company needs to close down and ceases its operations. Today, we will get to know the second type of voluntary liquidation called the MVL.
The MVL which stands for the Members’ Voluntary Liquidation is one that is undertaken by a solvent company. A business is only called solvent when such can perpetually meet its present and maturing debts and obligations. In simpler words, it is still capable of operations with assets that will suffice to keep it operating and to pay for its liabilities.
With the above said, it is illegal and not allowed for an insolvent entity to file for an MVL; however, the CVL (creditors’ voluntary liquidations) should be their option. To ensure that financially distressed companies do not mistakenly or worse fraudulently declare their financial status, a state of corporate solvency has to be submitted and proved.
But then again why would an otherwise operational company want to close down? Here are some of the more popular cases that can bring about an MVL:
- There are incidents where the sudden death, resignation or retirement of a significant and very vital member of the organization can lead the directors to decide that the business’ assets are better liquidated and distributed accordingly. This is often the case in many highly technical and computer or digital entities.
- Believe it or not, there are family run businesses where no successor would want to step up. This could be because the owners want to retire or the other family members want to pursue their other personal professions or maybe venture into a different kind of business.
- Another case is where the purpose of the business ceases to exist. Organizations or companies are set up for a certain reason as contained in the corporate vision and mission. When its purpose has expired so does its life but that does not mean that the business is already incapable of meeting tis obligations. It is possible that they can still run the business given the state of its affairs but when you look at the flip side of the coin, why continue an endeavor without a purpose?
A Members’ Voluntary Liquidation is one way of doing things but there too are other options available. Ask and consult your advisor.
Going into business has its own risks according to the experts at AABRS. Besides, putting up a company is in itself an investment. Undergoing through such entails that one knows the possible consequences may they be good or bad. With that said, some of the unwanted risks inborn to each and every company are the risks of bankruptcy, insolvency and losses to name three.
Although it is also quite true that a downward slope in your sales does not immediately signal that you’d be closing down in a few weeks time. Many companies undergo such a point somewhere in their business cycle. Such are inevitable. In fact, many of the well established companies today have almost not made it. Take Google and Apple for example. Before the sudden boom of their products and markets, they almost sold their companies and have experienced downturns that looked so bad continuing looked like a tremendous and stupid feat. But they picked themselves up and here they are.
But what are the tell-tale signs for you to take heed and start looking at business recovery options? Below is a list of three of these situations:
- You have failed to fulfill your financial obligations, late or missed vendor payments and a ballooning number of debts that have piled up at a hard to manage depth.
- There is a big shift in customer preferences that has affected sales and operations at a major level.
- The company has swayed from its mission, vision and objectives that the company has initially set at its birth and as signed by the founders or incorporators.
There are many business recovery options out there and here are a few of them for you to get to know of:
- Restructuring or the Pre-pack Administration is a very popular business recovery option. It seeks to sell the business as a whole or only a portion of it to a third party or even to one of the existing directors who wishes to do the purchase. It is restructuring in the sense that the entity operates under a new management giving it time to potentially recover and be able to bounce back.
- Turnaround Services is another approach wherein a team of professionals steps in to work in collaboration with the troubled entity and be able to device the perfect turnaround plan that will help the business recover from the deep.
- When insolvency becomes a conclusion, it is important to take a creditors’ voluntary liquidation to avoid any winding up petitions to surface. Although such business recovery option seeks to formally close the business, it is a good way to do so and allows the entity to liquidate its assets and distribute the proceeds to its creditors.
What is a winding up petition and when does a company receive one? If you have found yourself searching for those exact three words then it could mean that you are facing one or are potentially expecting one to happen which isn’t a really good situation to be in, in the first place. This could signal a possible and looming insolvency or bankruptcy. It can also be a sign that the entity has failed to manage and allocate its resources wisely, maintain and improve operations and encourage growth. A winding up petition is never good news. But there’s a way to act on it and to do so one has to get to know the enemy.
A business, may it be a sole proprietorship, a partnership or a corporation can potentially get a winding up procedure, WUP in short, when it has repeatedly failed to comply with its debts, liabilities and obligations to its creditors resulting in the latter to enforce action. Creditors who have received bounced checks, missed collections, unmet deadlines from the debtor company could ultimately lead them to do so.
It is however important to take note that most creditors will only resort to a winding up procedure when they have exhausted all other possible means to get their collections. A WUP can be costly and no creditor in their right minds will spend more than their expected benefits. Also it can take one, two or more creditors to act altogether in such a petition.
In the winding up petition process, the creditors will make a petition in court to liquidate the company and ensure that it stops making any more debts to worsen its financial distress and make it harder for them to comply with payments. Such shall be enforced by a court order and to counter it, the business has to act really fast especially the directors.
A very important reminder when one ahs received a WUP is to not put the business into a CVL which stands for a creditors’ voluntary liquidation. This is a voluntary procedure done by insolvent companies to liquidate assets, distribute proceeds to creditors in proportion to their interests and be freed of their liabilities to a certain extent allowable by law. This is deemed invalid when a winding up petition order has already been orders since the court can simply invalidate and reverse such. The best thing to do in such a situation is to talk to your advisor or counsel. Avoid acting abruptly. Acting fast should be couple with acting right and smart.