Restructuring distressed companies uk

A Guide to Restructuring Distressed Companies in the UK

Can we save a failing company without falling into insolvency?

The UK often uses administration to handle company insolvency. This reflects the complex nature of UK corporate restructuring. The Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 guide companies through financial difficulty. This guide details different restructuring paths to maintain efficiency and health.

It’s vital to understand insolvency tests and processes, like CVAs, Administration, and Liquidation. This guide also looks at the Companies Act 2006. It offers options like schemes of arrangement, plans, and dissolution. Companies can take early action to lower financial risks by knowing the difference between cash flow and balance sheet tests.

This article highlights the need for market adaptation and considering stakeholder interests. With the right legal strategies, companies in the UK can turn crisis into a chance for stability and growth. Discover how to navigate restructuring using English law, finding the best path forward.

Understanding Corporate Insolvency in the UK

In the UK, a company’s ability to pay off its debts decides if it is insolvent. The Insolvency Act 1986 sets out two tests to check this: the “cash flow test” and the “balance sheet test.” These examine if a company owes more than it owns, considering future and present risks.

By 2023, company insolvencies in England and Wales hit a peak not seen since 2009. This increase comes from less government Covid-19 support, higher debts due to the pandemic, soaring inflation, and growing interest rates. It’s crucial for struggling firms to understand these insolvency tests well, especially when dealing with potential future debts.

Troubled M&A deals are on the rise due to shaky economics, bringing both hurdles and chances for those involved. Due diligence can be brief, making it important to focus on finance, legal matters, key staff, and ESG issues. Expect fewer warranties and hardly any promises from sellers.

The UK has two main types of insolvency: Balance Sheet Insolvency and Cash Flow Insolvency. Administration lets troubled companies reorganise or sell assets while being protected from creditors. This is supervised by a licensed insolvency practitioner within a formal system. It helps manage the financial and legal challenges of corporate insolvency in the UK.

Grasping the legal bits of corporate insolvency is key for companies needing to restructure. Knowing the Insolvency Act 1986 and what it involves equips businesses. They can then tackle financial and operational issues, reducing risks and recovering from tough situations.

Initial Steps in Restructuring Distressed Companies

When starting the restructuring of troubled companies, an important step is to check the company’s financial health. You also need to make a detailed plan. This plan should show how to fix the financial issues with smart strategies.

Legal factors are key in the restructuring journey. Getting involved early can greatly help achieve success. It’s vital to know about laws such as the Insolvency Act 1986 and the Insolvency Rules of 2016. These laws shape corporate insolvency in England and Wales.

During the Covid-19 outbreak, new restructuring methods became popular under the Corporate Insolvency and Governance Act (CIGA). These methods, more costly than CVAs, are good for big companies. They work well for businesses in many places or countries.

The cross-class cram-down feature can force a plan even if not everyone agrees. This happens if 75% of a creditor class agrees to the plan. This way, the court can approve a plan with just one agreeing creditor class.

Winning support from stakeholders is key in restructuring. Their backing is crucial for success. It helps make the financial and operational recovery smoother. Working together with stakeholders fixes legal and operational issues more effectively.

Administration: Saving Companies as a Going Concern

Administration helps companies in trouble in the UK. It aims to save these businesses. Recently, company failures in England and Wales hit a record high since 2009. This followed the end of government support for COVID-19 and issues like debt, high inflation, and increasing interest rates. Because of these challenges, Administration plays a key role in keeping companies alive.

An insolvency practitioner takes over to reorganise or sell the company when it faces Administration. This step is taken to avoid insolvency and requires quick and smart financial decisions.


Pre-pack administrations are now a common way to save a company’s value. They involve selling the company’s assets to a new owner before the company officially goes into Administration. This helps the business keep running and makes for a smoother change during tough times.

Yet, buying companies in distress during Administration is hard. Buyers have to make quick decisions with limited info, focusing on the company’s finances, legal matters, and keeping important staff. Sellers may not want to give the usual promises and protections, which means buyers might have less security after the buy.

Administration gives a struggling company the chance to get back on its feet or find a better outcome for its creditors. It’s a critical part of helping businesses fix their finances and stay afloat in the long run.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is an important tool for fixing companies in trouble. It lets businesses make deals with creditors to pay back debt differently. This avoids harsher steps like going out of business. Under an expert’s eye, companies can work to get back on their feet.

To start a CVA, a business must suggest a plan to its creditors. It needs support from 75% of creditors and over half of its stakeholders. When agreed, all unsecured creditors must follow this plan. Only 2% of failing companies in the UK used a CVA in 2018. This shows it’s not for everyone.

CVAs are cheaper than other ways to fix financial issues. They can last from three to five years. This gives companies time to sort out their money and business.

Still, a CVA can harm a company’s credit rating. This makes getting new loans hard. But, directors can fix financial issues during this time. They might even move money from salaries to help pay the debt.

Lately, CVAs are popular for changing property leases, especially in shops and restaurants. New rules from 2016 have made the CVA easier. For example, voting can be done at virtual meetings now.

Restructuring Distressed Companies UK

Restructuring companies in the UK is now crucial due to increased financial stress. Recent data shows a 14% rise in UK insolvencies and a 27% increase in administrations throughout the year. Also, over 5% of UK companies are ‘zombie’ firms, struggling to pay their debts. This is a clear sign of deep financial issues.

Success in restructuring means creating flexible business models and strong financial management. First, we must pinpoint why companies are struggling, such as too much debt or refinancing failures. Over 40% of distressed mergers and acquisitions are due to these issues. And, industries like retail and construction are hit hard by low consumer spending.

It’s vital to tweak business models for market changes. This includes adapting to new customer needs and rising costs. Keeping an eye on these factors can align companies with economic conditions. Strategic financial management is about tackling debt now and planning for future stability with stakeholder and operational focus.

Looking into 2024, leaders expect more challenges due to economic issues and rising interest rates. Identifying these trends and planning around them can safeguard a company’s future. Effective planning can preserve value and keep companies healthy.

Scheme of Arrangement

A Scheme of Arrangement helps companies restructure effectively. It means they can come to a restructuring success through a legal path. This tool gets approval in court, making deals with creditors or members straightforward.

It’s different from normal insolvency methods. More court involvement ensures everyone’s interests, like secured creditors, are protected.

Scheme of arrangement

This Scheme can make creditors agree to the plan, which keeps the company stable. It starts with creating and proposing a plan. Then, the court approves and it’s put into action. The method is detailed, covering all legal bases to ensure it works.</ while maintaining operational continuity and securing agreements that cater to the diverse interests of creditors. This sophistication makes it particularly suitable for large corporations that require a robust framework to ensure long-term corporate health and effectiveness in their restructuring endeavours.

New Restructuring Plans Under CIGA

The Corporate Insolvency and Governance Act (CIGA) brought in new restructuring plans due to Covid-19. These plans help companies deal with money problems and find stability. A special part of these plans is the ‘cross-class cram-down’. This lets courts make a plan go ahead even if some creditors don’t agree. It makes the plans more flexible and strong.

Since starting in June 2020 and up to January 31, 2024, only 52 companies used the moratorium. This break gives companies 20 business days to breathe, which can be extended. If they need more than 40 business days, they must get approval from creditors or a court.

Compared to other methods, restructuring plans are becoming more popular for big, global companies. They do cost more than Company Voluntary Arrangements (CVAs). A 75% creditor vote is needed to approve them. Despite the higher cost, these plans are valuable when facing opposition from creditors.

The plans also make sure that unpaid debts from the moratorium are important later on. This boosts confidence among creditors and increases the success rate of restructuring. Companies facing financial trouble should act early to use these plans effectively.

Under CIGA, restructuring plans are meant to save companies that could do well in the future. They let company directors choose what’s best for their business and its stakeholders. The ‘cross-class cram-down’ is a key benefit. It allows a court to agree to a plan even if only one group of creditors agrees.

Liquidation: A Last Resort

Liquidation is the final move when dealing with corporate insolvency. It’s about shutting the company down and turning everything it owns into cash. This is to pay off people the company owes money to. The process can start in two ways. Either the shareholders decide to do it themselves, or a court orders it after a request from creditors or the Official Receiver.

There are a few types of liquidation, like Compulsory Liquidation, Creditors’ Voluntary Liquidation (CVL), and Members’ Voluntary Liquidation (MVL). Each one works differently and has different effects. Compulsory liquidation happens when creditors see no other option. It can cost between £1,490 and £1,990 to wind up a company, and it usually takes 28 days to start.

The COVID-19 pandemic paused winding-up orders for a while. This had a big impact on how liquidation works. After the pause, it’s important for companies in trouble to really understand what liquidation involves. From October 2021 to March 2022, the amount of debt needed for a winding-up order went up to £10,000. This gave some companies a little room to breathe. But getting advice from financial experts early on can often stop liquidation from happening.

Receivership is another way to deal with debt, but it’s not as common as liquidation or administration. It’s mainly for dealing with property. Knowing how receivership works is still important, though. It starts with a statutory demand and then a winding-up petition. This is often the last step for creditors to get their money back.

The job of a liquidator is very important in liquidation. They handle selling the company’s property and paying the creditors according to the law. After the pandemic, how businesses are wound up has changed. Companies now have to think carefully about their financial choices. There’s also a New Moratorium that gives a company 20 days to think about how to fix its financial issues.

Choosing to liquidate has big impacts on everyone from shareholders to employees. Therefore, everyone needs to know all the options out there, like a Company Voluntary Arrangement (CVA) or a Restructuring Plan. Even though sometimes liquidation can’t be avoided, taking steps early can help a company through tough times.


The UK’s corporate restructuring and insolvency scene is intricate and always changing. Temporary insolvency rules ended on 31 March 2022, leading to a spike in corporate failures not seen since 2009. The Corporate Insolvency and Governance Act (CIGA), introduced in June 2020, has brought significant changes. This includes the ‘cram-out’ mechanism used for the first time with Smile Telecoms in 2022 and the rise in parallel proceedings, shown by Vroon and Cimolai.

Choosing the right restructuring pathway is crucial for success. This involves spotting financial problems early and acting fast. The options include Company Voluntary Arrangements (CVAs), administration, or restructuring plans. While sector-specific, the moratorium provisions offer vital respite for struggling companies. Yet, since CIGA started, only 52 moratoriums have been granted up until January 2024.

To ensure a company remains stable and efficient, a bespoke approach is essential. Directors must be proactive, using legal options and consulting with restructuring experts for smooth navigating. Despite the drawbacks like higher costs and possible court delays, restructuring plans offer significant benefits. These plans can settle both secured and unsecured creditors’ claims and are advantageous in several ways. A forward-thinking approach helps distressed companies recover, benefiting all involved and ensuring future growth.and prosperousman>

Written by
Scott Dylan
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Scott Dylan

Scott Dylan

Scott Dylan

Scott Dylan is the Co-founder of Inc & Co, a seasoned entrepreneur, investor, and business strategist renowned for his adeptness in turning around struggling companies and driving sustainable growth.

As the Co-Founder of Inc & Co, Scott has been instrumental in the acquisition and revitalization of various businesses across multiple industries, from digital marketing to logistics and retail. With a robust background that includes a mix of creative pursuits and legal studies, Scott brings a unique blend of creativity and strategic rigor to his ventures. Beyond his professional endeavors, he is deeply committed to philanthropy, with a special focus on mental health initiatives and community welfare.

Scott's insights and experiences inform his writings, which aim to inspire and guide other entrepreneurs and business leaders. His blog serves as a platform for sharing his expert strategies, lessons learned, and the latest trends affecting the business world.


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