Overcoming boardroom opposition to prevent administration
Despite boardroom opposition, a resolution to commence administration, and a rejection of his prior offers for funding, a director and minority shareholder sought advice from Mercer & Hole’s Corporate Advisory team to prevent an administration order being made over a 30 year old manufacturing business which he was trying to rescue.
The board, in the face of various financial constraints, had determined that administration was the only route forward for the business. An application was made for an administration order but the sole dissenting director maintained that the commencement of a formal insolvency process was unnecessary in light of his offers of funding.
The director was determined to avoid the value destruction to the business’ goodwill which would result from the granting of an administration order where he felt a solvent solution could still be implemented.
We were instructed to assist the director in defending the application, to assess the financial information put forward in support of the application, and to advise the director on the future funding required to support the business, if it could be said to be a going concern.
Clearly if a solvent rescue could be achieved it would present by far the best outcome for the company’s creditors, as well as maintaining ongoing employment, and keep intact the supply chain for the customers and suppliers.
The financial information presented with the application showed forecast cashflow constraints and a purportedly insolvent balance sheet, as well as highlighting a number of pressing creditors. Whilst the business was in a critical position, it had not gone past the point of no return, and the director expressed concerns that his offers for funding were being dismissed for non-business reasons.
Closer inspection of the balance sheet showed two significant points, the provision in full of a significant debt which the director maintained was fully collectable, and the inclusion of the director’s redeemable preference shares as a liability despite the director’s confirmation that he would not seek to convert the equity to debt.
If either of these points of contention were reversed in the application exhibits, the purported balance sheet insolvency disappeared. Whilst the balance sheet position was important, the company’s cashflow was critical, and in order to obtain the time necessary to restructure the business the director had to be allowed to inject fresh equity capital into the business.
An impasse had been reached within the boardroom, which had led to the frustration of the director’s refinancing efforts.
Our Corporate Advisory team, after analysing the financial information and reviewing the funding offers put forward by the director, were able to file a witness statement in support of his contention that administration was not in the interests of the creditors. The hearing was consequently adjourned for seven days, during which we continued to assist the director with his negotiations with the board to allow his offers of funding to proceed.
The board withdrew their application for an Administration Order and the director was able to complete the debt and equity funding required to sustain the business as a going concern.
The case was a great example of our Corporate Advisory team using their combined expertise to avoid a formal insolvency process.
It continues to be a difficult time to be running a business. Directors can find themselves having to contend with the possibility of insolvency, despite there being a strong core business. In such circumstances, the commencement of a formal insolvency process may be counterproductive, even though simply continuing could expose the directors to personal liabilities.
At Mercer & Hole we will always work to keep a business whole where it remains feasible, and using the combined experience of the restructuring and corporate finance teams, will seek to maximise the value which can be achieved from any financially stressed situation. Whether seeking funding, concessions from trading partners, managing cashflow requirements, or undertaking an accelerated M&A proposal, there are a number of avenues which can be explored before commencing a formal process. Should a rescue not prove possible in the time available, stakeholders can be confident that, as a result of the accelerated M&A work undertaken and any other considered options, any post appointment sale of the business will achieve the best possible outcome.
Date: 28th November, 2016
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