Insolvency and liquidation can be a very traumatic time for the senior officials of any company. Not only does insolvency and liquidation represent a failure on their part to produce profitable results, it means every action they have taken especially during the current and previous financial year will be scrutinised in great detail.
During the insolvency and liquidation process, there is a Damocles sword hanging on top of every senior official’s head and if it found that some had exceeded their mandate or did something wrong, they might even end up doing jail time.
This acute trauma they undergo can be mitigated to some extent by the directors agreeing to and appointing Voluntary administration experts to help through the insolvency and liquidation process. The single most important benefit of a voluntary administration is that, the process freezes any action by the creditors, suppliers, landlords, guarantee holders and other stakeholders. These groups of people to whom the company might own money, are barred from taking taking action against the company until the voluntary administration process (usually one month) is complete.
The basic aim in a voluntary administration is to try and do everything possible so the company might survive. In the normal process, the creditors (through court appointed administrators) would have sold off all assets and liquidated the company. The voluntary administrator on the other hand tries to salvage the situation by paying off some creditors and entering into agreements with others. The whole idea is to allow businesses facing economic hardships to restructure and survive. It is intended to give the business some time to restructure without having to battle with the suppliers, creditors, landlords etc.
Voluntary administration can have two possible outcomes:
– All issues are successfully resolved with new agreements with creditors, the business is restructured and might even have a new management after company is returned to the directors.
– Liquidation the voluntary administrator fails to make any headway with the creditors, suppliers and others and has no option but to sell off all the assets at the best possible value. This results in Corporate Insolvency Services of the business.
As far as the creditors are concerned, it is in their interest that the company survives because a surviving restructured company will continue to provide business opportunities to the creditors and will tend to reward the creditors in the future for having stood by the company in its time of distress. However, whether this happens or not will depend on the reasons behind the financial distress.