Don’t let our clients leave it too late to get help

The great Covid-19 liability write down is under way, says Richard Simms.

Having had numerous discussions with accountants recently, it is apparent that a number of their clients are holding on to an increasingly unrealistic view that further Government help will be forthcoming and they are not seeking appropriate help and advice. Their clients are not yet ready to consider all the positive alternatives to business closure.

We cannot recommend more strongly that now is the time for businesses to take action.

Why?

The chancellor has conceded that there will be “a very difficult time for the economy over the next few months”. His reluctance to extend the furlough scheme received backing from Andrew Bailey, the Governor of the Bank of England, who said that despite the threat of rising unemployment it was right to close down the scheme as planned in October. Bailey told the BBC, it was important that policymakers helped workers “move forward” and not keep them in unproductive jobs.

Creating a plan to respond to these economic challenges ahead is the responsibility of all business owners.

Two options available as positive alternatives to business closure. Of course, you’ll already know something about Company Voluntary Arrangements (CVAs) and pre-packs. So I’m going to take a quick look at why one of these routes could be the answer to your clients’ current challenges.

Company Voluntary Arrangement (CVA): A CVA is a legally binding agreement between a business and its creditors. They will respond to an action plan by voting at a creditors’ meeting on whether to accept it.

If agreed you will, working with a licensed Insolvency Practitioner (IP), implement the action plan by setting up a schedule of monthly repayments. This schedule will determine, among other things, how much each creditor is paid each month, and how long the CVA will last (usually three or five years).

A CVA has advantages over alternatives such as a ‘pre-pack’ – where cash is needed upfront to buy the business. These advantages include:

  • Once agreed, directors are free to run the company. After all, no one knows a business better than the directors.
  • The business will be free from the burden of historic debt. Instead, it will usually be paying off a reduced percentage in monthly instalments.
  • It removes stress. The business is protected from legal and enforcement action from creditors.
  • Cash flow in the business should improve.
  • Directors can re-engineer the business, cutting costs and closing loss-making parts.
  • Creditors like them. They get more of what they are owed than if a company collapses.

CVAs are light-touch. The directors remain in control of the business. Because dividends to creditors don’t usually kick in until after the first year of the agreement – sometimes the second – it gives the directors breathing space, time to get the business “back on its feet.”

Pre-Pack Administration: Keeping it simple: a pre-pack administration is an insolvency procedure where a company with a sound core business enters into an agreement to sell its assets to a buyer.

This buyer might be a competitor, third party or the existing directors operating under a new company name (normally called a ‘newco’).

Pre-pack administrations mostly happen when a business needs to take drastic action because there’s an imminent threat of a creditor starting a winding-up petition. But it’s not all doom.

The pros:

  • Your business operates normally without any interruption, helping to preserve the value of the business if it is sold.
  • Once a business plan and purchase contract are drawn up, you are effectively protected by the court.
  • Debts are written off.
  • A pre-pack can be completed in as little as 24 hours.
  • Creditors also benefit from a pre-pack, as the company can realise a higher price.
  • There can still be some control for directors.

The cons:

  • The announcement of a pre-pack might appear in the press.
  • It can leave unsecured creditors feeling they’ve been ‘left high and dry’
  • A competitor could buy the company – they are often the most likely buyer.
  • The directors’ position can become perilous as new owners may want their own people in charge.
  • You must adhere to the TUPE rules. And all staff jobs need to be reviewed in the light of the ongoing business.
  • If you’re going for a newco then your assets and business must be independently valued.
  • If the company owes HMRC they may require a VAT security deposit to move forward.

In the news

Hotter Shoes can move forward with its plans to permanently close 46 stores after its Company Voluntary Arrangement (CVA) proposal received the green light from creditors at the end of July.

This will bring its total store portfolio from 61 to 15. There will be a number of redundancies too, but it is reported that at least 350 jobs have been saved.

CEO of the footwear retailer, Ian Watson said: “I would like to thank my colleagues for their support and understanding through this process. Following the impact of Covid-19 the CVA was a regrettable but necessary step to avoid the likelihood of Hotter going into administration causing a much larger number of job losses, and was critical to ensure a viable future for the business. Now, we can focus on accelerating the implementation of our strategy to develop the respected and valuable Hotter brand with a greater emphasis on its online offering, which should establish a successful long-term future for the business.”

In another example, Staffordshire-based family attraction Drayton Manor Park was sold in a pre-pack administration to Drayton Manor Resort Limited, which is part of the Looping Group. The new company retained the park’s 599 employees as part of the buy-out, under the same terms and conditions.

The joint administrators were Mike Denny and Peter Dickens of PwC. Mike Denney said: “The Group had been facing exceptionally challenging trading conditions. In February, Storm Dennis forced the Park to close unexpectedly, while its planned reopening in March was delayed due to Covid-19. These factors combined to exacerbate cash-flow pressures on the Group.”

In a third example, Byron was sold to a ‘newco’ owned by Calveton UK Limited. Founded in 2007, Bryon is one of the UK’s most well-known casual dining operators with 51 sites across city centres, neighbourhoods, retail and leisure centres and tourist destinations.

Following their appointment, the joint administrators sold the brands and certain assets of the company in a pre-pack administration to a newco owned by Calveton UK Limited, with the firm’s existing investors taking a minority stake. The deal will allow 20 sites to continue to trade, with 551 employees transferring to the new owner.

Conclusion

Many companies are feeling fragile right now. If the core of a business is strong, please don’t let your clients leave it too late to seek the right help.

There may be a number of possible routes forward for a business. We will always listen to what the client wants to achieve and clearly set out the options. Directors make the final decision – it’s our role to advise and support them through the process.

A CVA can give Directors vital time to get their business back on its feet. Done right, a pre-pack administration can also be a seamless way of ensuring a business can continue to survive and grow.

For advice and help with your clients’ business challenges, call 01455 555444 to speak to me or one of my experienced team of Business Rescue and Insolvency Practitioners. Alternatively email me at Richard@fasimms.com.

• Richard Simms is Managing Director of the AMLCC, FA Simms and BusinessSupport.co.uk.

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