Creditors’ Voluntary Liquidations (CVLs) are at historically high levels. Nitin Joshi* makes the case for Administrations.
The corporate landscape can be like a post-dystopian Darwinian experiment in which only the well-funded survive. It is hard to think otherwise. Corporate carnage in recent times has been rife with carcasses once throbbing with trading activity littered all over these Isles. Some high streets and industrial estates look like updated versions of Steinbeck’s Dust Bowl.
The facts speak for themselves. Company insolvencies in 2023 were just over 25,000, the highest since 1993 and 14% higher than 2022. Of these, the number of Creditors’ Voluntary Liquidations in 2023 was the highest since records began in 1960.
These are eye watering numbers. Free market disciples will say this is natural churning in a mixed economy weighted towards free enterprise. There has always been a nagging thought in my mind, though, asking whether the well-trodden CVL route is always the answer to treating insolvent companies. Its use as an insolvency procedure is prolific. Is it always right though?
What other options are there to the Creditors’ Voluntary Liquidation?
Advising professionals really do need to get a better handle on the pressures Directors are under. Their commitment and motivation are often ignored, yet it can make all the difference between a successful turnaround and a hot air balloon, without the hot air. Time and time again, the CVL is pitched as the only solution.
So, what are the options? One is the sparingly used Company Voluntary Arrangement (CVA), which we will talk about in detail another time. They certainly have their place, and we have an experienced team here that has delivered many successful CVAs,
For now, however, let me say they are not easy, firstly, to get off the ground and secondly, for them to last the distance. This is because future trading profits simply chisel away legacy debt, whilst necessarily having to pay current ongoing liabilities, topped with the reluctance of suppliers in extending credit terms. For many companies, these are hurdles that cannot be overcome.
That leaves one insolvency procedure that has become a particular speciality at Antony Batty & Co, amidst the other insolvency and turnaround solutions we offer.
It is a procedure often quoted in the press and on the tip of the tongue for start-up entrepreneurs finding themselves on the brink of closure because, typically, the cash burn has, er, burned all the cash and scores of shareholders have muted their mobiles.
It is a procedure that provides a shelter from the storm.
I am referring to Administrations. With a capital ‘A’.
What benefits does an Administration offer?
First, let us talk about its defining feature. The one thing a company that is under creditor pressure desperately needs is breathing space or a moratorium, from the Latin meaning delaying.
And delaying is exactly what an Administration does. A moratorium gives time to explore rescue and restructuring options. In most cases, this prevents insolvency proceedings against the company and stops creditors exercising their rights, such as issuing petitions for winding up or suppliers trying to invoke their retention of title clauses and recover goods for which they have not been paid.
There are three main statutory purposes:
- Rescuing the company as a going concern, or
- Achieving a better result for creditors than would be likely if the company were wound up, or
- Realising property in order to make a distribution to one or more secured or preferential creditors.
So, I can anticipate the question – why do companies rush to CVLs when surely many are able to satisfy one of these purposes for Administrations?
Professional costs are often cited, that placing a company into Administration is prohibitively expensive, and that it is cheaper to go down the CVL route. This in itself can be a false economy and the question is unhelpful and inversely poised. The real question should be, would Administration produce an all-round better result than a CVL? If the answer is empathetically in the affirmative, directors should encourage their insolvency advisors to talk about Administration.
Proportionality is important at Antony Batty & Company. The firm has proved that professional costs can be perfectly reasonable when viewed through the lens of meeting agreed objectives. Everyone is happy if the end result is a good one.
The secret to managing Administrations is keep it tight; deploy expert professional staff who know their way round insolvency law and work with directors when necessary to maximise realisations. Also, think about how to salvage the underlying business. A game plan early is key. It should be a collegiate and collaborative process.
So, where there is a viable underlying business, think first of staying draconian creditor action, seek moratorium and get some breathing space to think about options.
(*Nitin Joshi is an Insolvency expert and Partner at Antony Batty & Company, LLP. With over 40 years of experience in Insolvency. Nitin is routinely called in by professional intermediaries, accountants, lawyers, corporate finance boutiques and serial entrepreneurs, all working to help their financially distressed clients.)
