There is much doom and gloom about the UK economy right now, with the coronavirus pandemic set to cause the deepest recession in Britain for 300 years.
Many companies, large and small, face the prospect of administration. But rather than fear it, could it be a blessing in disguise?
One of Britain’s best-known entrepreneurs, Richard Branson, said, in a letter to staff after Virgin Australia went into administration in April 2020, “Never one to give up, I want to assure all of you – and our competitors – that we are determined to see Virgin Australia back up and running soon.”
This is how it’s possible for administration to help you and your business get back on track.
- How could administration benefit your company?
- The types of administration we offer – with real-life examples
- Where to start
- Corporate Insolvency and Governance Bill
How could administration benefit your company?
- Move forward debt free
- Create a more agile business
- Save jobs – and the wider economy
- Enhance your business reputation
The ‘breathing space’ administration affords is one of the main benefits – but it’s far from the only one.
1. Move forward debt free
Negotiating deals to pay off creditors means you can move your business forward debt-free. This increases your scope for investment in technology, staff, product development and marketing/PR. It could also give you a competitive advantage over rival businesses carrying a debt burden.
2. Create a more agile business
Too often companies operate a business model ‘because we’ve always done it that way’. Streamlining is an inevitable part of the administration process, giving you the opportunity to work better with customers, suppliers and staff.
For example, the coronavirus pandemic has shown many firms that they can operate without having to rent office space (or they can vastly reduce their office-space requirements). Mike Hampson, chief executive of Bishopsgate Financial, told the thisismoney website the company is “ditching [its] swanky offices in London”. The business employs 18 people but following the lockdown he has realised that the staff only needs to meet a couple of times a month to operate, and all will be working remotely.
3. Save jobs – and the wider economy
Unlike insolvency, where all jobs are lost, administration means there’s a good chance some jobs will be saved.
And by continuing to trade, your company is helping others by doing business with them – and so the wider economy. The government benefits too, from an increased tax take and spending less on social security programmes.
4. Enhance your business reputation
Taking a company into administration and bringing it out the other side leaner and more fit-for-purpose shows you have solid business acumen and are not afraid to make tough decisions when they need to be made.
The types of administration we offer
Administrations generally resolve in four ways: with a CVA, with a pre-packaged insolvency sale, with a healthy, stable business, or with liquidation/dissolution.
For the purposes of this article we will focus on the first two.
1. Company Voluntary Arrangements (CVA)
CVAs are a common way of dealing with potential insolvency. Working with a licensed insolvency practitioner (IP), you must work out a schedule for repaying your debt – also outlining what percentage of the debt you will be paying back.
A CVA is a formal arrangement that must be overseen at all stages by the IP, who ensures creditors are paid the right amount and on time.
Creditors vote to accept the proposal, and in many cases approve because they accept that having some of their debt repaid is better that none at all (which could be the case with liquidation).
At the end of the term of the CVA a certificate of completion is awarded, subject to approval from HMRC. This proves the CVA was carried out in accordance with the terms and conditions agreed between debtor and creditor. The process has also been used by clothing store All Saints, Hotter Shoes and high street giant Debenhams.
Insolvency trade body R3 describes a pre-pack as: “…where the sale of a company’s business and/or assets is arranged before the start of an insolvency procedure then completed immediately or shortly after the procedure begins. Proceeds from the sale are used to repay the company’s creditors.”
Pre-packs take place when an IP agrees a pre-pack is the means of achieving the best possible returns for the company’s creditors (all pre-packs are overseen by an IP).Bed retailer Dreams is one high-profile example of where a pre-pack has been used successfully. Others include Blacks Leisure and Little Black Dress.
Where to Start
1. The Covid-19 disaster
Businesses across virtually every sector are suffering as a consequence of the pandemic. Despite government help, such as the Coronavirus Job Retention Scheme and various grant and loan initiatives, the job-loss total continues to rise.
Hospitality, aviation, utilities and retail have seen particularly high redundancy figures. Of these sectors, 24,348 jobs have been lost across insolvent UK retailers. And 31,628 jobs are still at risk because many retailers still expected to permanently close some stores.
Retail administrations this year have led to more workers being victims of insolvencies in the sector than for the whole of 2019.
Against this backdrop many business owners, through no fault of their own, find themselves with a diminished order book and late-paying customers. This combination quickly causes cash flow problems which, unfortunately, in many cases will become insurmountable.
It is vitally important that when the time comes you seek professional help immediately. Any delay could prove fatal to your company’s chance of survival.
2. Appointing an administrator
Engaging the services of a licensed Insolvency Practitioner (IP) is the first step – and the most important one. Companies such as F.A. Simms employ Insolvency Practitioners with years of experience, with experience of working with companies of varying sizes in a wide range of sectors.
One of the crucial aspects of appointing an IP is that it buys your company time. Effectively, it keeps creditors at arm’s length, providing much-needed breathing space. Any legal action against your company will be frozen for the duration of the administration.
Working with the administrator you can use this time to create a recovery plan, which outlines the next steps to be taken.
The recently passed Corporate Insolvency and Governance Bill has introduced a new 20-business-day ‘moratorium’, which you have to apply for. This keeps the directors in charge of the day-to-day running of the company, but this must be overseen by a ‘monitor’, who must be a licensed IP.
This moratorium allows you time to seek new investment or restructure the business, subject to approval of the monitor. You can apply to have this initial period extended by a further 20 working days, but court approval is needed for this.
At the beginning of the moratorium process the monitor must agree that the extra time is likely to result in your business being rescued from insolvency.
3. The recovery plan
The recovery plan explains how debts are to be repaid, as well as how costs can be cut to make the business viable going forward. It is important to remember that while the administrator is ‘on your side’, they have a legal duty to act in the best interests of your creditors.
4. The creditors’ meeting
By law, you must call a creditors’ meeting within 10 weeks of your company entering administration.
At the meeting (which will probably take place remotely) you will explain your recovery plan to creditors. If the majority of them vote in favour of it then the administrator will proceed with it. In this event, the administrator may want to set up a creditors’ committee to help expedite the recovery plan.
Generally, creditors tend to be supportive: they are more likely to recover more of the money they are owed from a company in administration than a liquidated one.
Acting together, and with your input, the administrator and creditors’ committee will be able to discharge your company’s debts, streamline and restructure it, and then move it forward into profitability and a brighter future.
Do note, however, that if the recovery plan is rejected then a court will decide on what happens next.
The Corporate Insolvency and Governance Bill
The focus of the Corporate Insolvency and Governance Act 2020, which came into force on 26th June 2020, introduces a formal ‘moratorium’ – an initial period of 20 business days – during which no legal action from the majority of creditors can be taken against a company without court permission.
It will allow SMBs extremely valuable time to formulate a rescue plan – including administration. We explain the Act in more detail here.
Going into administration can be daunting, a tough step to take. But with the right help it need not be the end of the line for your business. You could emerge debt-free (or with much less debt), leaner, with more insight and more positive that you have been in years.
It enables you take a step back, evaluate what you as a business are doing wrong – and what you are doing right. With this insight you can re-engineer the company, streamline processes, chop out the dead wood and start afresh. Importantly, you‘ll need help with all of this – and that’s where a licensed Insolvency Practitioner comes in.