In our insolvency and restructuring blog series, we’ve been exploring the various options available to businesses that may find themselves in financial distress, but fundamentally have a sound business that has the potential to succeed.

We’ve covered topics, such as Company Voluntary Arrangements (CVAs), pre-pack administrations, as well as what to consider in the early stages of restructuring.

When it comes to proactive ways to deal with a business that needs a helping hand, these are the most popular and, to a large degree, the most effective methods to keep a business above water. However, there are some less common tools that, in the right circumstances, could help companies to move forward. So, what are they?

Liquidation
Traditionally, liquidation is a terminal process. It’s generally intended to bring the life of a company to an end in an orderly fashion.

However, there are scenarios where liquidation can be used in a more proactive way. In certain circumstances, typically smaller businesses can use liquidation in a similar way to a pre-pack administration, where the assets of the business are essentially reacquired from the liquidator.

It’s also important to note that there are two basic forms of liquidation – insolvent and solvent. On the one hand, if you cannot afford to keep the business afloat and know it’s the end of the line, then it’s worth considering insolvent liquidation as a means to formally close down the business. On the other, if the company has been successful, but you’re in a situation where you want to wind it down (e.g. as part of a wider group restructure, or perhaps after an SPV has served its purpose), then a solvent liquidation may be the best route for you. In that scenario, the assets of the business are realised and distributed to the shareholders.

Moratorium process

The standalone moratorium was introduced via the Corporate Insolvency and Governance Act 2020. It can be used independently (in that it is not automatically followed by an insolvency process – moratoriums in English law have traditionally been attached to administration or a CVA, for example) and is designed, according to the Government, to create ‘formal breathing space in which to explore rescue and restructuring options, free from creditor action’.

Except in certain, limited circumstances, no insolvency proceedings can be instigated against the company during the moratorium period, which is 20 days. It also prevents most forms of legal action being taken against a company without permission from the court.

Insolvency statistics indicate that the moratorium has not been widely used. That might be down to a lack of understanding of the process – new law always takes time to settle of course – but, it’s important to note that, while 20 days may appear a short amount of time in order to resolve serious financial issues, the intention is really that a business uses that time to consider and finalise wider restructuring plans. In reality, the expectation would generally be that the moratorium would be followed by some other form of insolvency process. In that sense, there is no reason why the moratorium cannot be a useful tool in the right circumstances.

What are the options?

When a business finds itself in difficulty, the good news is that there are a number of options they can explore with the support of a professional adviser. Those options have been covered at greater length in this series and the links to our previous blogs are below:

General Restructuring;

CVAs; and

Pre-pack Administration.

It’s true to say, of course, that what works for one business may not necessarily work for another. Similarly, what is effective in one sector might not have the same impact in another. The key to insolvency and restructuring is to understand the current state of your own business and to be open minded about the various options available to you. No-one ever wants to seek insolvency advice, but sometimes it is impossible to avoid. Professional support is likely to be hugely valuable if you do find yourself in that position.

If you would like to discuss this blog, or any of the blogs in our insolvency and restructuring series, contact me on  (0)7920 237687 or email daniel.clarke@pannonecorporate.com

Company Voluntary Arrangements (CVAs) have grown in prominence in recent years, as businesses have sought to implement them as a means to continue trading in the toughest of conditions – most notably on the high street.

Most recently, Wilko is understood to be considering a CVA in a shake-up of its business and upmarket retailer, Robert Goddard, is the latest business in a growing list to use a CVA as a restructuring tool. The independent mini chain, which operates across 10 locations and employs 100 people, had its CVA approved by creditors at the end of June – a move that protects both its staff and retail outlets.

Despite their popularity, CVAs remain the subject of debate and discussion. Consider, for example, the landmark High Court ruling last year when a large London landlord overturned a CVA decision relating to one of its contractors [link – https://www.insidehousing.co.uk/news/large-london-landlord-overturns-cva-in-landmark-high-court-ruling-81483].

The increased use of CVAs to manage obligations to landlords, in particular, is clearly divisive – driven by the continued fall-out from a global pandemic and the current economic landscape, both of which are accelerating the fortunes and misfortunes of many businesses, particularly those on the high street. However, there are companies that have suffered irreparable damage in the last three years. As such, CVAs are a viable option for those businesses finding themselves unable to recover from the relentless challenges that have rained down on them since the beginning of 2020.

Whatever your view on the current framework, it’s hard to deny that CVAs have played, and continue to play, a vital role in enabling businesses to continue to operate.

So, how do CVAs work?

A company voluntary arrangement (CVA) is, in simple terms, a legally protected agreement between a company and its creditors to restructure its debt. There are very few rules about what terms a CVA can and cannot contain – the driving factor tends to be what the creditors of the company will realistically approve. Typically though, a CVA will entail an insolvent company repaying all or a proportion of its debts over an agreed period of time. Usually, this is between three to five years. Provided that the company complies with the terms of the CVA, it will effectively be free of the pre-CVA debt at the conclusion of the arrangement.

What are the benefits?

The biggest benefit of a CVA, provided that it is approved by the creditors of the company in question, is that it enables the insolvent business to continue trading more or less normally. A CVA also allows business owners to:

• Keep control of the company – unlike administration or liquidation, when control of the company is passed to an insolvency practitioner, the directors maintain control of the business. A CVA is supervised by an insolvency practitioner, but that role tends to be significantly less hands on as compared to other insolvency procedures.
• Reduce the debt pile– debt owed to creditors can be reduced.
• Keep hold of contracts and accreditations– it is typically easier to retain key contracts, accreditations, licences and the like in the context of a CVA (as compared to administration or liquidation). This should be reviewed ahead of committing to a CVA though – a CVA will still often trigger insolvency related provisions in typical contracts.
• Trim the fat – a CVA may facilitate the termination of certain contracts and leases to help ease the cost burden on the business. Again, however, you should seek advice if this is an outcome you wish to achieve – CVAs modelled in this way are not straightforward (as is demonstrated by the case law referred to above).
• Breathing space– Importantly, CVAs allow you the time to restructure and make any necessary changes to the business model, laying the foundations for future growth.
• Keep the cash flowing – cash flow is integral to the success of any business and a well thought out CVA can, indeed should, help to improve your cash flow.

Seemingly secure companies have found themselves in a fragile position in recent years – a prospect that may have seemed unfathomable as trading drew to a close at the end of 2019. Given the current state of affairs, with inflation causing the cost of doing business to swell, the price of funding becoming prohibitive to many, not to mention the debt pile gaining significant fat thanks to 13 consecutive interest rate rises, it’s becoming particularly difficult for cash-poor businesses with little working capital and growing liabilities to operate.

With so many unknowns and factors outside of the control of businesses, the key is to be prepared, flexible and open to opportunities for restructuring and re-organisation. It’s important for businesses to take a proactive approach, to keep their financial position under ongoing review and consider all of the possibilities potentially available in a timely manner. Waiting in hope may only minimise the options available and force businesses into increasingly difficult choices. A CVA may well be one answer to the issues a business faces.

If you’d like to discuss the blog in more detail, contact me on  (0) 7920 237687 or email daniel.clarke@pannonecorporate.com

Those at the helm of a business should always be looking ahead and taking proactive measures to help future-proof the success of their organisations. 

As a leader, if you’ve carried out financial forecasting exercises and have concerns over the commercial viability of the business in the coming months or years, then now is likely to be an ideal time to consider undertaking an exercise to restructure or reorganise the business.

Restructuring does not have to be a significant exercise and it does not have to involve formal insolvency. Often there are relatively simple steps that can be taken to  support the goal of becoming more profitable and building longevity – but where do you start? Here, I share the five key areas to consider in the early stages of restructuring.

• Identify the cause of any financial issues or pressure

Identifying that things aren’t going to plan is one thing, but truly understanding the root cause of the issue is another – and until you know exactly what’s causing pressure, you can’t make an informed plan.

Is it a particular area of the business that’s underperforming, a major contract that isn’t profitable, or lease liability at a site that isn’t commercially viable? Perhaps a particular creditor is causing issues, or you’re stuck in the throes of litigation?

Asking questions like this should be the first stage in developing a restructuring strategy – it will not only identify current issues that need addressing now, but potential future headaches that could be avoided.

• Review banking arrangements and supply contracts

The next stage in the process is to audit your existing banking and financial arrangements and explore whether they can be altered to afford the business some financial breathing space. 

There are several options to consider, such as whether terms can be extended or renegotiated, or if a factoring or invoice discounting facility could assist with cashflow. Alongside banking arrangements, you should also review supplier contracts – can prices or payment terms be renegotiated to avoid operations grinding to a halt?

Although you may not want to make long term changes here, even temporary alterations in arrangements could help you navigate current business distress until you’re in a more stable position. 

• Consider the creditor position 

When a business is struggling with debt and cash flow is lacking, an option to consider before exploring external financing is looking to negotiate with your existing creditors. You can ask to lower your monthly payment amounts, extend payment terms, or seek to set up a longer term payment plan.

You’ll need to demonstrate that you’re able to keep up with the proposed new terms and be prepared for creditors to deny your request but, as they say, if you don’t ask, you don’t get!

• Review internal resource

As much as every business owner wants to avoid making staff cuts, it’s worth considering whether a redundancy process or reduction in staff numbers could assist – or whether hours or contracts could be reduced to save costs. 

The unfortunate reality is that, in some cases, reducing internal resource is unavoidable. However, if you’re considering making redundancies as part of restructuring plans, you must follow the usual process. Take professional advice to avoid unfair dismissal claims which could lead to even more stress and expense. 

• Reorganise group structure 

Simplifying the corporate structure of a group can also support in a business restructure. You should review whether contracts and liabilities are distributed effeiciently between parent companies or subsidiaries.

A reorganisation will often involve the transfer of assets, which may be shares in another group company or the business of another group company from one to another.

You could manage risk or exposure by moving liabilities around the group, or creating specific subsidiaries.

Restructuring can feel overwhelming but once you’ve identified issues, solutions may well present themselves. The best way to approach each stage should be discussed with a lawyer, but if solutions are not obvious or straightforward, you may need to consider a more formal process. 

Over the next blogs within this series, we’ll take a deep dive into the following options:

• Administration (including pre-pack sales)
• Company Voluntary Arrangement (CVAs)
• Other formal insolvency options.

If you need restructuring advice now, don’t hesitate to contact one of our experts. We’d be happy to help. Contact restructuring and insolvency partner, Daniel Clarke on  (0) 7920 237687 or email daniel.clarke@pannonecorporate-com.stackstaging.com

A Company Voluntary Arrangement (CVA): a term not necessarily high on the agenda for many businesses, but one that has risen in prominence over the last two years or so, and particularly since March 2020. Most notably on the high street, where retailers have sought to use the arrangement as a means to continue trading in the toughest of conditions.

Increasingly a point of debate and discussion, CVAs were once again thrown into the spotlight earlier this month, when the British Property Federation (BPF) urged the government to overhaul UK insolvency rules.

In a letter to corporate responsibility minister Lord Callanan, the industry group representing landlords questioned the manner in which CVAs have been used more recently. It argued that commercial landlords were being disproportionately impacted by arrangements that can be voted through by other less-affected creditors.

The increased use of CVAs to manage obligations to landlords, in particular, is clearly divisive – driven by a global pandemic that is accelerating the fortunes and misfortunes of many businesses, particularly those on the high street. There are companies that have suffered irreparable damage due to COVID-19; those that have weathered the storm, but have been left with a balance sheet in need of repair; and those that have benefited and seen revenues grow through diversification, or simply by being in the right place at the right time. CVAs have increasingly become an option for those businesses finding themselves in the former two categories.

Whatever your view on the current framework, it’s hard to deny that CVAs have played, and continue to play, a vital role in enabling businesses to continue to operate. Without such arrangements, more retailers would have disappeared from the high street in 2020, with repeated national lockdowns adding even more pressure to cash-stretched and under-capitalised businesses.

COVID-19 has blighted seemingly secure companies and placed them in a position of fragility – a prospect that seemed unfathomable for many 18 months ago. The ongoing restrictions imposed by the government will only make it harder for businesses to gain the kind of financial footing they need in which to attract suitable funding and ultimately recover – whether that’s from lenders or stakeholders. What’s more, there are several issues sitting on the horizon that will only make that recovery more difficult. The furlough scheme has, of course, been extended, but it cannot continue indefinitely.

There are countless deadlines that have been kicked into the long grass – quite rightly, some would say, to provide much-needed respite for struggling companies. These include deferred VAT and PAYE and, more informally in many instances, supplier costs, rental payments and obligations to lenders. Added to that is the ban on commercial landlords evicting tenants. The eviction moratorium has been extended once again until the end of March, together with restrictions on the use of statutory demands and presentation of winding up petitions. Given the current state of affairs, there’s nothing to say that these deadlines won’t be extended further. However, when all of these issues do finally crystallise, it could be particularly difficult for cash-poor businesses with little working capital and growing liabilities.

It’s clear that banks and lenders will be keeping a watchful eye on businesses over the course of 2021, reviewing their financial position and deciding whether further support is justified. The reintroduction of the preferential status enjoyed by HM Revenue and Customs in insolvency is a change that may well force lenders to reassess their position as to financial risk. Under the changes, which came into force at the beginning of December 2020, ‘crown preference’ places the UK tax authority ahead of banks, lenders and other holders of floating charges. This is in respect of certain tax liabilities when it comes to the priority of payments in insolvency proceedings. This potentially significantly weakens the position of lenders in insolvency scenarios.

With so many unknowns and factors outside of the control of businesses, the key is to be prepared, flexible and open to opportunities for restructuring and re-organisation. It’s important for businesses to take a proactive approach, to keep their financial position under ongoing review and consider all of the possibilities potentially available in a timely manner. Waiting in hope will only minimise the options available and force businesses into increasingly difficult choices.

If you would like to discuss business restructuring and re-organisation further, please speak to our insolvency team.