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Demystifying Insolvency – the undertaker or A&E?  

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When a director thinks of an insolvency practitioner (IP) as the undertaker of the corporate world, they will put off asking for help as long as possible. When they eventually make the call, they will get exactly that kind of service: help managing the company’s end-of-life.

A well-informed director who knows the value of buying specialist bespoke advice when its needed and has an appreciation of the kind of insolvency-act tools at our disposal, will make the call far earlier and will have a vastly different experience when they do.

In this, the second of my articles on debunking the myths surrounding insolvency, I want to look at the reality, as opposed to the myth of what happens when you call an IP and how fast, definitive action could save more than you might think.

How can an insolvency practitioner help?

A restructuring professional regularly finds themselves across the table (or on a video call nowadays) with a director at the helm of a company in distress. There may not enough cash coming in to meet demand; credit ratings are perhaps being chipped and suppliers are threatening to withhold deliveries while taking more aggressive action to get the front of the queue. As stressful as that picture may sound, it is a normal day at the office (or home office) for an IP.

During an initial conversation, restructuring professionals know which reports they need to see and which questions to ask. Most importantly, they will know the three things the director should do immediately and three things they shouldn’t, to prevent the situation worsening and to protect the director from becoming personally liable.

While the IP is identifying the key unique components of the case, they will also be considering the likely options available to the director. These options will be drawn from the practitioner’s tool kit and adapted to fit the circumstances before them.

Another point I make to directors considering an engagement, it that my written advice – assuming it is adhered to – provides more by way of assistance than the content of the words themselves. The advice is proof that the directors are not sticking their heads in the sand, but rather are taking proactive steps to protect the interests of all stakeholders, especially the creditors. This is especially important for owner-directors who may have an unconscious bias towards their own interests but have a legal duty to act in the creditors’ interests when the financial position is uncertain.

What are my options?

After the initial meetings, the insolvency practitioner may be engaged to prepare a formal letter of advice setting out their findings and making recommendations as to the options available to the directors.

It may be the case that some restructuring of the debt is all that is needed, perhaps coupled with the sale and lease back of a key asset. It may also be that an informal agreement can be reached with key suppliers with the directors giving certain undertakings. Alternatively, it might be the case that the directors need to use one of the rescue-focused insolvency act processes such as a CVA or Administration, which require an IP to be formally appointed.

The insolvency act solutions are rarely an ideal outcome and often involve creditors suffering losses to some degree. However, if the practitioner recommends an insolvency process, it is because this course of action will constitute a better outcome for creditors than the alternative, which, more often than not, is the corporate undertaker.

Options like a CVA seek to secure creditor support that enables the existing company to continue to trade while others such as an Administration combined with a pre-packaged sale maximise the value for creditors and allow the trade, assets, and employees to survive in a new company.

Can all businesses be rescued?

Unfortunately, not all distressed businesses can be rescued. Perhaps external forces such as a step change in technology or government legislation has caused irreparable damage to the market in which a company operates. Alternatively, the situation might have been allowed (by the directors) to deteriorate to the point where the company’s underlying trade is impaired beyond recovery.

A critical factor that often dictates the fate of the company is the moment at which the directors take the pro-active step of seeking expert help.  Like many problems in life, the sooner they’re identified and addressed, the less damage they do. To finish with the illustration I started with, the undertaker has far fewer tools to do his job than the teams of people at A&E, and he knows the outcome the moment the phone rings.

Here to help

If your business is failing and you need some expert help, please don’t hesitate to contact me for a free initial consultation.

Dominic Dumville Corporate Restructuring Partner

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