A Guide to Insolvency and how to Avoid it

The economy has been hammered by a series of damaging situations from Brexit, the pandemic and from a doomed economic policy delivered by the 49-day government in 2022.  It is not unexpected that there have been a higher number of company failures.  The Insolvency Service disturbingly reports that in the past two quarters insolvencies were at the highest level since the second quarter of 2009.

Nicky Fisher, the president of R3, the trade association insolvency and restructuring professionals,  https://www.r3.org.uk/

said: “The sad fact is that businesses are being hit from a variety of angles – and all these blows have an effect on their bottom line. Cost inflation has been a problem for some time and while this is expected to ease it is still sitting higher than many had predicted.”

An even more disturbing is the fact that many of the companies that have failed are well known brands that appeared to the outside eye to be sound, for example, Carillion, the construction company whose disastrous end saw it owing what is thought to be £2 billion and its CEO, Richard Howson disqualified as a director for eight years.  Flawed governance, overreaching itself and risky contracts all contributed to its fall.

One of the most talked about collapses is Wilko, founded in 1930 and still in the hands founding family, it slithered into failure, despite the concerted attempts to save the day.

So how did a well-liked high street staple, recognised for its wide range of products and affordable prices collapse?  Its demise was in part blamed on its expensive High Street locations, as opposed to its rivals’ retail park locations, the cost of living crisis and a failure to recover following the pandemic.  The Range Home and Leisure Limited, the rival company that acquired what remained of Wilko, has announced the proposed opening of five new outlets under the Wilko name which is a far cry from the 408 outlets previously under the Wilko brand but it’s a start.

Olu Ajasa, a partner, pointed out “one of the most common features when a company failure, is that the decision makers or directors do not recognise when the company starts to decline; often believing that it is a temporary situation that will easily be remedied and therefore there is no review the situation or any attempt to seek the appropriate advice as to how the company may be protected and prevented from failing. Investing in good quality assurance services to help in decision making is a must” Olu further commented “there are many steps that can be taken to avoid losing a company but so frequently the directors do not want to face the prospect of disruption, having to shed staff and the perceived loss of face. However, this is infinitely better than losing everything and putting a company in liquidation.”

So what is insolvency and how to avoid it?  Giambrone & Partners insolvency lawyers urge business owners to be alert to changes in their sector.  All commercial sectors evolve and the astute business owner should be constantly alert to see if there are any threats on the horizon that could impact on the business. Surround yourself with the first class expertise of a well-regarded commercial and insolvency lawyer who can flag up any potential risks in any new law, such as changes in employment law, that the business owner can prepare for rather than being caught contravening unexpected legislation that can be costly.

Complacency accounts for a number of insolvencies each year, for example the reduced foot fall on the High Street, made infinitely worse by the pandemic, should have been a red flag for retailers like LK Bennet, Laura Ashley, Cath Kidson and Victoria’s Secret. Other factors such as the lockdown in the pandemic carried off Party Pieces Holdings, the family firm owned by the parents of the Princess of Wales, when their market disappeared due to lockdown.  Paperchase suffered the same fate.

The options available to companies staring in the face of collapse can often save the day if they are implemented as soon as possible.

Early Steps to Take to Avoid Insolvency and Company Failure

    • If you have identified that your business is under threat undertake a savings audit. Shave as many costs as possible including shedding staff.
    • Consider your major outlays such as premises, are you unnecessarily based in expensive locations? Supplier costs, make sure you are getting the best deals. Request a pricing review.
    • Give thought to a short-term factoring or invoice discounting option to improve cash flow.
    • Review your funding options, a straightforward bank overdraft may not be the cheapest option.
    • Seek advice from impartial legal professionals to establish your position in respect of all possible options.
    • Reconsider your client offering, have you moved with times, is your business model still in line with clients’ expectations and the trends in your sector, or is it out-of-date. The road to failure is littered with examples of businesses that did not adapt to new innovations and changing times.

Restructuring and Turnaround

There are a number of reasons that the directors may choose to restructure.

    • Change in the objectives of the business as a means of preparing for a sale, merger or buyout.
    • Provided a company has the support of shareholders and creditors a company may sell any available assets to enable a restructure of its financial arrangements.
    • Turnaround restructuring, this is an exercise aimed at quick decisive action to reshape a business and set it on the path of recovery.

Insolvency how to continue trading

The three options that permit an insolvent company to carry on trading are as follows:

    1. Contact the creditors, usually through a third party such as a lawyer, to see if an amicable informal arrangement can be reached whereby the creditors will wait for payment or accept staged payments. This can be used if the company is experiencing temporary difficulties and the creditors are not considering formal action.  Such an informal arrangement is not legally binding and one or all the creditors can withdraw from the agreement if they choose to do so.
    2. The company enters a Company Voluntary Arrangement (CVA) see below.
    3. The company is put into administration. This offers a short term respite from any creditor action enable the company to trade out of its financial difficulties or affords time to find a buyer.

Company Voluntary Arrangement (CVA)

A CVA is an agreement that is drawn up between the company and its creditors by the company.  The creditors or shareholders cannot propose a CVA, only the company itself.

    • The company can continue trading whilst the CVA is in place.
    • A CVA can only be executed through an insolvency practitioner.
    • A CVA must be approved by 75% of the creditors, defined by debt value.
    • The agreed staged payments, paid through an insolvency practitioner, must be adhered to or the creditors can apply for to wind up the company. 

Liquidation

This is when the shareholders of a company decide to put it into liquidation and there are enough assets to pay all the debts. That is, the company is solvent.

    • Liquidation or winding up ends a limited company and it will be dissolved and struck off the register at Companies House and will no longer exist.
    • Liquidation is overseen by a liquidator, usually an insolvency practitioner, who is responsible for the completion of the company’s contracts, settling any legal disputes, selling any assets, collecting the company’s debts, paying the creditors from the available funds and repaying shareholders.

If you have concerns about your business at any stage, there may be far more than you realise that can be done to reverse a challenging situation. It is always worth finding out your options from experienced insolvency lawyers.  Giambrone & Partners expert insolvency lawyers will be able to assess, advise and guide you to the best possible result.

Olu has extensive experience and expertise in all types of alternative dispute resolution for commercial issues, as well as commercial litigation.  Olu advises on complex, high-value, domestic and multi-jurisdiction matters.

He reputation for assisting clients in complex cross-border commercial disputes, shareholder disputes, partnership disputes, contractual disputes, loan facility agreements, secured lending, both corporate and insolvency relating to individuals. Olu has expertise in resolving real estate disputes (commercial and residential) and landlord and tenant law (commercial and residential).

Olu also has considerable experience in corporate and personal insolvency matters, including preparing and responding to statutory demands, winding-up petitions, investigating company directors and also assists with all aspects of corporate insolvency litigation.

Olu is highly regarded by his clients for his resoluteness in satisfactorily concluding complex disputes swiftly and in line with their commercial objectives.


 

 

 

 

 

 

 

 

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