Case Study - Compulsory Liquidation - Alternative options
How to avoid a winding up order & compulsory liquidation
How to avoid compulsory liquidation - A case study
Protecta (Plymouth) Limited (a fictional company) is a security company providing security guards to other businesses. The company has 50 employees. The company has minimal overheads, apart from the "wage cost" of the employees.
The company had four main customers, the largest of which failed leaving Protecta (Plymouth) Limited with a bad debt of £100,000. Since that bad debt was incurred three months ago the company has recovered its previous level of turnover, but that turnover is now spread over ten customers.
The cash flow reduction of £100,000 caused by the bad debt resulted in Protecta (Plymouth) Ltd "stretching the due dates" of the payments needed to be made to the company's creditors. One of those creditors issued a winding up petition two weeks ago and the court is to consider whether or not to make a winding up order at a hearing set to take place in three weeks time.
As soon as they receive the winding up petition the directors of Protecta (Plymouth) Ltd arrange to see a turn around specialist.
The realisable assets of the company are determined to be:
|Good trade debtors||170,000|
|Total realisable value of assets||197,000
The amounts owed out by the company are found to be:
|Bank (secured by a debenture)||160,000|
|Other unsecured creditors||20,000|
The adviser explains that since a change in the law on 15th September 2003 VAT and PAYE are no longer classed as preferential creditors. The advisor prepares a statement of affairs which (ignoring the new rules on "top slicing") shows the order of priority of distributing the realisable assets should a compulsory liquidation ensue.
|Realisable value of assets||197,000|
|Less: Payable to bankers under their floating charge||160,000|
|Surplus cash available for other creditors which total £200,000 (subject to settling liquidators costs)||37,000|
Clearly the £200,000 of creditors could not expect much of a dividend in the liquidation after costs were deducted from the £37,000 net sum available to any liquidator.
If it is assumed that the company has been restored to profitability , but is subject to the creditors overhang, then the company directors would have explained to them the following alternatives:
- Freezing the situation by obtaining an administration order - since new laws were introduced on 15th September 2003 the appointment of an administrator is a much simplified process. The administration "freezes" creditors actions and gives a breathing space to decide what to do. The appointment of an administrator automatically adjourns the winding up petition.
- Freezing the situation by proposing a company voluntary arrangement (CVA) - the advisor points out that since 1st January 2003 there are two types of CVA that can be proposed. The advisor explains the pros and cons of each type. Only one of the CVA's creates an "automatic freeze" on the winding up petition.
- Commencement of a phoenix company - the directors of Protecta decide that they do not wish to propose a CVA but instead wish to incorporate a restart phoenix company. They decide that they do not want to acquire the vans and fixtures owned by Protecta - instead the successor company buys new.
In these circumstances the directors will face an uncertain financial position as they will need to purchase the "goodwill" of the business from the ultimate liquidator of Protecta Limited.
From the above insolvency case study you will see that your company does have options if a compulsory liquidation threatens.