Administration – A new beginning?
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, writes Richard Simms.
Many companies, large and small, face the prospect of administration. But rather than fear it, could it be a blessing in disguise?
The Azzurri Group has recently been sold out of administration, saving around 5,000 jobs.
Steve Holmes, chief executive of Azzurri Group, said, “Despite being a successful operator, the immediate loss of revenue during lockdown meant that we have had to make some incredibly difficult decisions to protect the business for the long term.”
Discussing their new investor, Mr Holmes said, “Their additional investment has enabled us to preserve the majority of our restaurants, stores and jobs and I am confident that, under TowerBrook’s ownership, Azzurri will navigate the period ahead successfully.”
How could administration benefit your company?
The ‘breathing space’ administration affords is one of the main benefits – but it is 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).
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.
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 seek help from an IP – only a licensed insolvency practitioner can supervise a company entering a moratorium – and formulate a rescue plan.
Going into administration can be daunting. 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 a clearer plan for the future.
Richard Simms, Managing Director of FA Simms & Partners