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Rescuing companies within a group – can be a challenge

Mercer & Hole were contacted for advice by the directors of a group of companies that provided various learning support, training and work experience services throughout the northern Home Counties. The group included two not-for-profit companies, two commercial companies (one of which was a joint venture with a third party), and a not-for-profit holding company.

The original company had been spun off from a local authority in 1995 and had initially traded successfully. In recent years it had suffered a number of setbacks, which had resulted in a significant restructuring exercise downsizing both staff and premises. Withdrawal of major contracts and subsidies had meant that cash reserves were depleted trying to get the company back on an even keel. The group development plan had included the acquisition of complementary commercial entities which could distribute their profits to the holding company in order to support the not-for-profit operations. This allowed continuing negotiation with the local authority in relation to an on-balance sheet pension liability which had been transferred out of the local authority with the employees in 1995 and resulted in the principal not-for-profit company and the group showing a seven figure balance sheet deficit. The directors had become increasingly concerned by the continued run on cash reserves, the under performance of the commercial entities and the inability to remove the pension deficit from the balance sheet and had been negotiating with a third party to purchase the company’s business to take it forward.

When no purchaser could be identified who could act quickly enough, the directors needed advice about insolvency and whether the company, or parts of the company, could be rescued. It was clear from the outset of our involvement that the company was extremely distressed and did not have sufficient funds to meet salary requirements at the end of the month. However, there were a number of workstreams that had the potential to be profitable if they could be extracted from the company and the group without significant investment. It also quickly became clear that balanced with the responsibility to the company’s creditors was a responsibility to other stakeholders that might not necessarily arise in a ‘for profit’ insolvency estate. Most notable was a group of vulnerable young adults to whom the company had provided learning support.

We quickly set to work to review the available financial and operational information, to split out the operations of the different entities, and to make sure that if the main not-for-profit company did go into an insolvency process the impact on the rest of the group could be minimised. During our review exercise the search for third party purchasers continued and significant interest was generated in the company. However, potential purchasers could not overcome, in the time available, the risk of the pension liability transferring with the purchase of the business.

With no cash and no realistic prospect of a sale, the directors were forced to make staff redundant and place the company into liquidation. The work we had undertaken to minimise the impact on the group meant that other group companies could continue to trade and support for the vulnerable young adults could be transferred to a third party. The interplay between ensuring support for such a stakeholder group and maximising realisations in the estate for creditors was a fine and complicated balance. While the young adults were supported and responsibility for provision of their learning needs was transferred to a third party, as liquidators, we could not simply give away the intellectual property developed by the company over many years of running the teaching programme. This balance can be challenging when dealing with companies in the not-for-profit sector and can even play on the emotions of the most thick skinned insolvency practitioner!

Further workstreams that could be separated were identified and, where possible, sold. In particular, the schools’ student work experience workstream was sold to a local authority following a negotiation which saw a final sale price some five times greater than the initial bid. As well as generating a significant return to the estate, the sale also meant that, despite some initial disruption, it would be possible for the schools to attain the work experience places they required. A further significant result of our strategy was the repayment of the secured creditor in full and generation of a surplus from the book debts which was paid into the liquidation estate.

An additional asset of the liquidated company was a debt due from the group’s parent company. The parent company’s only assets were its holdings in subsidiary companies, which themselves had been significantly affected by the group’s plight. The parent company was also liquidated and the disposal of the subsidiaries was assessed in order to try and preserve some value for the parent company’s insolvent estate. It was also important to separate the other subsidiaries from the group, in order to give them the opportunity to survive, continue to trade as a going concern, and therefore preserve both employment and the provision of services. The disposal of the subsidiaries has generated a return to the parent’s insolvent estate, which may allow a distribution to the parent’s unsecured creditors.

Advising and restructuring a non-performing group with a seven figure pension deficit, no cash and no material assets, through continued trading of three of the five group entities, whilst protecting the services for the most vulnerable group of stakeholders and restructuring the group’s businesses – using liquidation where appropriate - has proved both challenging and rewarding in equal measure.

The Restructuring & Insolvency team at Mercer & Hole has extensive experience in advising directors on their responsibilities and duties, particularly if there are concerns as regards the financial viability of the business.

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