Is your Company facing Insolvency? Administration may Save the Day

The recent challenges facing businesses have made it a hard road to survive for some, particularly in the retail sector. The unprecedented circumstance of a pandemic leading to lockdown could not have been predicted or planned for, the economic crisis and rise of interest rates added to the already difficult financial climate. The presumed safety net of business interruption insurance was so fraught obfuscation that the Financial Conduct Agency (FCA) had to mount a test case to clarify the situation. The economic crisis came hard on the heels of the pandemic and gave little opportunity to struggling companies to recover.

It is hardly surprising that roots of some but not all, of the renowned retailers demise started as a result of the changes during this time. The news that Ted Baker, one of the real retail success stories, has joined the queue of failing retailers has been met with consternation in some quarters given the stellar rise, reputation and presumed resilience of the business. There are key factors that must be kept on top of and recognised or disaster may follow. No matter how high you fly or how popular your brand is, businesses must keep a very close eye on their market sector and the changing needs of their customers.

Olu Ajasa, a Partner, commented “any business can be damaged by unanticipated events outside its control. However, avoidable errors are inexcusable such as the £58 million black hole discovered in Ted Baker’s accounts due to an inventory miscalculation.” Olu further pointed out “a close eye must be kept on changing customer trends and industry innovations, nobody wants to be selling gas mantels in an electrical world. Also, if you find your business is struggling to pay its debts and cash flow is slowing, taking early action to stabilise the business, even if sacrifices must be made, is the best way to ensure that the business survives”

In a series of articles Giambrone & Partners insolvency lawyers will outline the options available to an ailing business; the pros and cons of administration below:

Administration – what it means for your business

If you are facing serious financial difficulties and the risk of insolvency is looming, one consideration from the insolvency palette of options is entering into administration. This is a formal procedure for insolvency which aims to attempt to rescue the business, if at all possible but primarily the procedure should create the best option for your creditors, which makes it a popular choice, under certain circumstances, for all parties involved.

Administration is a process where an administrator, who must be a licensed insolvency practitioner, is appointed to manage the company’s business, deal with all its affairs and property and other assets, taking over the role of the company’s directors. The administrator is monitored by the court, the creditors and their regulatory body. The aim is to rescue the business as a going concern. The creditors of a company, its directors or a floating charge holder can apply through the court (or out-of-court route) for a company to be put into administration.

Administration has a statutory time limit of 12 months but can be extended or shortened with the permission of the court. A statutory moratorium is imposed, preventing creditors from taking legal action without the court’s permission, this is one of the advantages in that it provides a breathing space to enable all efforts to be made to rescue the business.

The administrator may trade the company whilst attempting to restructure the company or find a buyer. The outstanding debts owed to the business will be pursued on behalf of the creditors, which can include legal action and investigating the possibility of fraud. As to be expected there is often insufficient money in outstanding debt to pay all the creditors therefore there is a prescribed order for payment:

• Fixed charge creditors
• Insolvency process costs
• Preferential creditors
• Floating charge creditors
• Prescribed Part
• Unsecured creditors
• Shareholders

An administration can end in several ways:

• Part of all of the business is sold on to another company and the part of the business that remains unsold is liquidated.
• The existing business receives a capital injection that enables it to trade
• A restructure cuts the loss-making aspects or divisions of the company
• The company is liquidated
• A voluntary arrangement is agreed where the creditors agree to accept staged payments whilst the company trades

Giambrone & Partners insolvency lawyers remind directors that they must act in the best interests of the company and its creditors when insolvency is a real possibility. Actions worsen the position of creditors once insolvency is a possibility could be seen as wrongful trading. Legal advice is essential to evaluate the options and maximize the chances of a successful administration. The impact on creditors, employees, stakeholders, customers and suppliers must be carefully considered.

Approval must be sought from the creditors and a proposal must be drafted to enter administration, a meeting will then be convened with the majority of the creditors attending, who then can vote on whether to accept the proposal.

The disadvantages are limited to the cost of the procedure, the potential reputational damage the business brand and the time taken from the core business activities to deal with the aspects of administration.

Our insolvency lawyers have a wealth of experience in assisting a wide range of financially distressed businesses, a proven record of implementing well thought out restructuring strategies to ensure a viable future for the business.

Olu Ajasa has extensive experience and expertise in all types of alternative dispute resolution for commercial issues, as well as commercial litigation. Olu advises on complex, high-value, domestic and multi-jurisdiction matters.

Olu assists clients in complex cross-border commercial disputes, shareholder disputes, partnership disputes, contractual disputes, loan facility agreements, secured lending, both corporate and insolvency relating to individuals. Olu has expertise in resolving real estate disputes (commercial and residential) and landlord and tenant law (commercial and residential).

He also has considerable experience in corporate and personal insolvency matters, including preparing and responding to statutory demands, winding-up petitions, investigating company directors and also assists with all aspects of corporate insolvency litigation.

Olu is highly regarded by his clients for his resoluteness in satisfactorily concluding complex disputes swiftly and in line with their commercial objectives. 

If you are facing problems and would like to know more about how to manage insolvency please contact us at clientservices@giambronelaw.com or please click here.