Business Rescue & Liquidation: What’s the Difference?

If you are an SME owner, you may have faced financial distress at some point, especially during uncertain economic times.

In such situations, understanding the difference between business rescue and liquidation is crucial.  This will allow you to navigate your business through these often unprecedented challenges.

Both options have distinct implications for your business. Making the right choice at the right time can significantly impact your company’s future. Whether you provide goods and services or work in a specialised field, nobody is immune from these kinds of issues.

Business rescue: A lifeline for financial distress

Business rescue is a term primarily used in the context of corporate insolvency. It refers to a process of attempting to save a financially distressed company from going bankrupt or being liquidated. Business rescue consists of various procedures and mechanisms that are designed to help struggling businesses get back on their feet.

Some of the key business rescue mechanisms available in the UK include:

Company voluntary arrangement (CVA): A CVA is an agreement between a company and its creditors to restructure its debts and repay them over an extended period. The company can continue to trade for a period of time while it pays off its debts.

Administration: Administration is a court-led process where an insolvency practitioner is appointed to take control of a company. The typical result is that the company is restructured or sold as a going concern.

The most appropriate business rescue mechanism will depend on the specific circumstances of the company and its creditors. It’s important to seek professional advice from a licensed insolvency practitioner to assess the options available. This will assure your company follows the appropriate procedures.

Liquidation: The end of the road for insolvent businesses

Liquidation, on the other hand, is a process that involves winding up the affairs of an insolvent company. It then distributes its assets among creditors to satisfy outstanding debts.

This process signals the end of a company’s operations, and its assets are sold off to generate cash for debt repayment. Liquidation is typically the last resort for businesses that have no reasonable prospect of recovery. It is initiated when it is clear that continuing to trade would only result in further losses for creditors.

Key steps of liquidation include:

Appointment of a liquidator

A licensed insolvency practitioner is appointed to oversee the liquidation process. This ensures that the company’s assets are realised and distributed fairly among creditors.

Ceasing of business operations

The company must cease trading immediately, and all employees are typically made redundant. This marks the end of the company’s existence as a legal entity.

Sale of assets

The liquidator is responsible for identifying and selling the company’s assets. They can convert them into cash to repay outstanding debts. This process can be lengthy and complex. The liquidator must realise the best possible value for the company’s assets in a timely manner.

Distribution of proceeds

Once the assets have been sold, the liquidator distributes the proceeds among the company’s creditors. This is in accordance with statutory priorities. Any remaining funds are then distributed to shareholders, if applicable.

Choosing the right path for your business

Understanding the differences between business rescue and liquidation is essential for SME owners facing financial distress. In general, business rescue is a preferable option if there is a reasonable prospect of recovery. This aims to preserve the company and protect jobs.

If the company’s financial situation is beyond repair and there is no hope for a viable future, liquidation may be the only option.

When deciding which path to take, consider the following factors:

Prospects for recovery

Assess the viability of your business model, market demand, and potential for growth. If your business has a solid foundation and its financial issues are temporary, business rescue could provide the support needed to overcome these challenges.

Financial obligations

Evaluate your company’s current debt levels and cash flow. also look at the likelihood of meeting these obligations. If your business is unable to repay its debts, liquidation may be the appropriate course of action. This will then prevent further losses for creditors.

Stakeholder support

Engage with stakeholders, such as employees, suppliers, and creditors, to gauge their willingness to support a business rescue plan. Strong stakeholder backing can significantly increase the chances of a successful rescue.

Professional advice

Consult with a licensed insolvency practitioner or financial advisor to gain a thorough understanding of your company’s financial position, and to receive guidance on the most suitable course of action.

Timeframe

Consider the urgency of your company’s financial situation. If immediate action is required to avoid collapse, liquidation may be necessary. However, if there is time to develop and implement a rescue plan, business rescue could be a more suitable choice.

Get free advice

Facing financial distress is a challenging experience for any SME owner, but understanding the differences between business rescue and liquidation is crucial for making informed decisions that protect your business’s interests.

Business rescue offers a lifeline for companies with potential for recovery, while liquidation is the final step for businesses with no hope of survival.

By carefully considering your company’s situation and seeking professional advice, you can choose the right path for your business and navigate through financial turmoil.

Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation