Business Rescue Survival Guide Part 2 – Dealing with the inevitable – what happens if I am facing insolvency?

In the second part of the Business Rescue Survival Guide, Robin Meynell of McTear Williams and Wood explores what happens if all rescue plans have been exhausted and your company faces insolvency

Company insolvency is needed when a company has net liabilities, when it has reached the point of no return or cannot pay debts when they fall due – and is insolvent. As soon as this happens directors of the business should take advice from a licensed Insolvency Practitioner (“IP”) because:

• The situation will impact how the business should be run
• It is sometimes possible to trade out of the situation if advice is sought early enough
• There are strict penalties for getting it wrong that IPs can help you avoid

It is important to remember that directors of an insolvent company have a legal duty to act in the best interests of creditors and need to be careful to avoid wrongful trading and personal liability or other misconduct that could lead to disqualification. This may sound worrying but an IP can assess your situation relatively quickly and give you the guidance you need.

During a discussion they can talk through all the business rescue options and if necessary the insolvency options such as the following.

• Trade on and out
• Prevention is better than cure.

If a company can avoid having to break cover and compromise with creditors then it should. It is not unusual for businesses to have to juggle cashflow for short periods but not all the time

As a company becomes distressed it usually happens slowly over a long period until towards the end when it becomes rapid and directors have to fight on multiple fronts – for example when credit insurer’s withdraw. If the decline is not just about cashflow and revenue and costs need to be re-aligned then cut early and hard so you start to see the benefits quickly.

Don’t be optimistic. Make sure forecasts are brutally realistic otherwise you might pursue this option when another business rescue option is more appropriate. If cashflow is tight prepare a rolling 12 week or short-term daily cash forecast so you understand the cash position through-out each month end.

If your clients are thinking of introducing last chance funding do so safely. We have various ideas how to, so call us first!

If the business is struggling it is probably insolvent or near insolvent. If so, the directors’ duties begin to change from acting in the interests of shareholders to acting in the interests of creditors and to protect themselves they should record decisions, take and follow professional advice. Case law has established that following professional advice gives directors a high level of protection.

Raising fresh funding

In the current climate it can be difficult to raise finance to fund the turnaround of a distressed business. Often directors find they have to put money in personally or look to family and friends for funding. If you are considering doing this talk to us first – there are relatively safe ways of doing this where if the company was to fail you should be able to get your money back.

Before considering how to inject new funds or giving new or additional guarantees you should first estimate whether investment in the company is worthwhile. Is a better return achievable by closing the business and using the available funds for other investment opportunities? Or is it appropriate to use an insolvency procedure to restructure the business first?

At all costs avoid putting good money after bad. At the risk of stating the obviously it is important to get the basics right.

• Make sure you understand what has gone wrong and you know how to fix it.
• Prepare a business plan and financial forecasts – be realistic.
• Be smart if injecting rescue funding.
• Have a plan B.

If you decide to invest make sure that enough money is put in to fund trading until the company can be cashflow positive again and that you have a contingency plan if things do go wrong. There is little point in getting halfway through your planned turnaround only to run out of money and have to put the company into liquidation.

Other options for additional funding could include extended banking facilities with your current provider, business angel investors, specialist lenders, factors, bridge funders and finance brokers – providing cash when you need it most.

Read our briefing sheet for more detail on funding a distressed business

Negotiate with creditors

One of the greatest fears for directors is how creditors will respond to the news that they will not be paid on time or maybe not at all.

It may be that a company can be saved and creditors eventually paid in full if it is possible to buy some time. Having an Insolvency Practitioner involved early can be invaluable. They can deal with your creditors directly taking the heat off directors. In turn creditors can be reassured that the distressed business is receiving professional advice. If you cannot trade on and out without doing deals with creditors then you are going to have to enter into time to pay arrangements(“TTP”).

If a company cannot pay its debts as they fall due then it is insolvent. By doing a TTP a company can, through agreed extended terms, become solvent again.

In the Covid-19 era creditors and lenders are expected to be more receptive to rescheduling payments. In particular HMRC, whose debts can build up very quickly, is under political pressure to be lenient. HMRC is often open to any reasonable offer but informal TTPs with more than a few creditors are usually unworkable.

Company Voluntary Arrangements (“CVA”)

CVAs were introduced in 1986 and got off to a slow start but with the decline in the high street and now Covid-19 most national retailers/casual diner businesses are either in or thinking about doing one as they can be used to walk away from unprofitable outlets and reduce rents.

A CVA allows directors of a company in financial difficulty to reach an agreement with its creditors regarding payment of its debts. The CVA process has to be carried out by a licensed insolvency practitioner but unlike administration and liquidation the directors remain in control.

The advantages of a CVA is that creditors cannot take action against the company during the CVA and once it has been completed the company has no liability to pre-CVA creditors. Although a CVA is not suitable for every company in financial distress it can allow the company to trade through its difficulties and give the directors more time to get their finances back on track without threat from creditors.

CVAs can be used if a company:

• Just needs time for something to happen (a contractual receipt/sell an asset/refinance/win litigation) to enable creditors to be paid in full or part.
• Wants to restructure and make voluntary contributions over a period of time (typically 5 years).
• Wants to wind down a business
• To get the necessary 75% by value approval of creditors a CVA needs to offer something significantly better than administrations/liquidations – historically 30p to 40p in the pound compared to a few pence in liquidation … and with the reintroduction of Crown preference this will be much harder to achieve.

A word of warning, most CVAs fail – because most are based on voluntary contributions over 5 years that are too ambitious and more often than not things change …

For more information download our ‘brief guide to CVAs’

Administration (including pre-packs)

If a CVA won’t work then maybe an Administration could.

In 2003 administrations became main stream when banks could no longer appoint administrative receivers under new debentures. The major advantage over liquidation is that administration creates a moratorium stopping creditors from taking enforcement which can assist to sell a business and assets as a going concern.

Administration is a legal process designed to help struggling but potentially viable companies by protecting a business from its creditors whilst restructuring takes place. Ideally a company in administration can continue to trade through its difficulties and come out the other side as a going concern but more often than not it is used to achieve ‘a better realisation of assets’ or to facilitate a payment to preferential and secured creditors.

These days directors can choose their own administrator to work with rather than waiting for the bank or another creditor to impose one. Most administration appointments are made by the company’s Board of Directors but a lender with a floating charge has a five day window to veto the Board’s choice of IP and appoint their own choice.

Sounds good? Well unfortunately it comes at a high cost and is rarely affordable or suitable for smaller businesses. Also if a sale of the business as a going concern is on the cards then liquidation might be a better option as that avoids usually substantial TUPE liabilities (see “Liquidation” below for further details regarding TUPE).

For more information download our guide Pre-pack administrations

An accelerated administration process that requires expert handling.

In 2003 no one had heard of pre-pack administrations but they quickly came to the fore and even today the majority of administrations are pre-packs. Over the years pre-packs got a bad name as cosy details behind closed doors and have become increasingly regulated so that today there has to be open marketing and detailed disclosure to creditors soon after the deal is done. Nevertheless pre-packs can be a useful tool to preserve value in a potentially viable business, help retain employment and provide a swift and better outcome for creditors. But the truth is that Administrations are expensive and will only be suitable for most smaller businesses in specific circumstances.

Liquidation

If administration won’t work then that leaves Liquidation.

Liquidations have been around since the introduction of limited liability companies in 1844. Used when a company has reached the end of the road.

An insolvent liquidation can be a Creditors’ Voluntary Liquidation (”CVL”) initiated by the directors and approved by the shareholders or a compulsory liquidation by a court order. The latter process takes 2 or 3 months before a liquidator is appointed, is quite costly and results in a civil servant known as the Official Receiver being appointed.

A creditors’ voluntary liquidation effectively ends your responsibilities and uses the remaining assets of the company to pay off your creditors. Directors will always opt for CVL over a compulsory liquidation because it’s quicker and they get to choose the insolvency practitioner. The assets are sold to the highest bidder – and that could be you – directors are legally permitted to buy back their business and assets in a CVL and part of the process of considering a CVL is helping directors explore that option.

A run of case law in Europe and the UK has determined that TUPE applies to all administration sales which transfers all employee liabilities to a purchaser (which can be significant) but does not apply to business and asset sales by a liquidator. For most insolvent small businesses, where employee liabilities can make or break a sale as a going concern, a CVL will likely be the best option and will potentially save employees jobs..

Download our guide to voluntary liquidations

Robin Meynell  is an Associate with McTear Williams & Wood formed in 2000 by Andrew McTear, Chris Williams and David Wood. Andrew and Chris had previously worked in the corporate recovery department of a so-called ‘Big Four’ accountancy firm. When it pulled out of the insolvency market in East Anglia they saw a gap in the market for quality business rescue and insolvency services for SME businesses in East Anglia and set about trying to fill that.

Today McTear Williams & Wood is one of the largest regional independent business rescue and insolvency practices in the UK providing clients and professional advisors with comprehensive business rescue and insolvency services employing a team of six insolvency appointment takers and over 50 staff working from offices across South East England in Cambridge, Colchester, Ipswich, London, Norwich and Peterborough.