Administration – the pros and cons

My role as an insolvency practitioner entails me working with directors to identify and then implement the least worst option for their insolvent company.  I say ‘least worst’ because we do not live in a perfect world, no insolvency process ticks all the boxes, there is always a ‘hangover’.  And all processes have a hangover for any buyer of the business. 

Administration is a common ‘solution’ for large retail insolvencies.  The House of Fraser administration has given us the opportunity to remind ourselves of what’s good and what’s bad about administration generally, and I shall also draw out some of the difficulties House of Fraser’s new owners could be having going forward as a result of the process that’s been followed.  Here are the main Pros and Cons: 

Pros

  • Administration is a good way of writing off creditor debts that a company cannot ever hope to repay.  Creditors are held back, their actions stayed, then later on their debts are written off.  The appointment of the administrator can buy time to formulate a plan for reconstructing the business and/or freeing it of its debt burden.  Typically this is achieved by the administrator selling on the business and assets, debt free, sometimes after some ‘pruning’ of costs / employee numbers.  The additional debts created by such cost cutting by the administrator is written off as an additional unsecured debt, along with the other unsecured debts, rather than having to be met out of the company’s limited cash.
  • The administrator has immense powers, he can do virtually what he wants with the company’s assets, including those owned by third parties, for example assets subject to hp, lease and reservation of title.  I’ve already mentioned the potential sale of the business and assets as an option.  This can be conducted after a period of trading (generally unlikely, this is discussed below) or as in House of Fraser’s case, through a pre-pack – a sale conducted immediately following the administrators’ appointment- done to enable the assets to be sold quickly and without the unsecured debt burden.
  • Although the buyer of the insolvent company’s business takes on employee contacts ‘as is’ under TUPER, it does not assume responsibility for the company’s pension scheme deficit.  In the House of Fraser’s case, right now the deficit is estimated at £170m, two times what Ashley paid for the business and assets.
  • The combination of several of the above pros means that some jobs can often be saved.

Cons

  • Without a period under the management of the administrator, often the problems that led to the company’s failure are not resolved, they remain.  Any buyer of the business and assets still has a good amount of work to do to turn the business around.
  • Landlords cannot, unless the buyer’s covenant is good, be forced to take an assignment of the insolvent company’s leases over to the buyer.  Often – particularly in the case of retail insolvencies – the buyer would like to renegotiate completely new terms.  The problem is he does not have the best negotiating position – it’s just a case of ‘mutually assured destruction’ should negotiations fail.  That’s to say mere administration – if not conducted after a CVA – does not solve the problems caused by a company suffering from excessive property costs.  In the House of Fraser’s case, the new owner will have to conduct a good many tough negotiations with landlords as they try to agree cheaper property costs.  If those negotiations prove to be unsuccessful – there might be no business worth saving.
  • As employees are typically transferred under TUPER, the buyer has to take on many of their existing terms.  In those cases where the failed company has been overly generous, the buyer either has to renegotiate or terminate – whatever he chooses to do, it will be costly for him.
  • The buyer of the business cannot force people to deal with them.  Suppliers are hurting, they have lost money, they want payment for stocks the business is holding.  They might want to charge the buyer more for supplies going forward, or refuse to offer payment terms.  The buyer will have to carry out lengthy negotiations with key suppliers.  The viability of the business in its new form might be in question unless those negotiations prove to be successful.
  • As administration is a complex procedure, it is always a costly process.  Always upwards of £20,000 for even the smallest business, administration is not an appropriate solution for small insolvencies for costs reasons, even if there are commercial reasons making it so.
  • Like all insolvency processes, some business value is lost.  In the House of Fraser’s case, the banks and bondholders (who hold security) are going to lose three quarters of their money, and unsecured trade creditors and landlords will get virtually nothing back.  It can take a buyer years to rebuild that value, the company’s reputation.
  • It can be difficult, if not impossible, for an administrator to trade the company on under his control.  Suppliers and bankers cannot be forced to extend more credit, administrators won’t give any guarantees to lenders, customers can be difficult.  If it’s not possible to trade on and administration is still the most appropriate option, the only option may be a prepack.

The thing that you need to go away is administration deals only with some of the problems of a business, it does not deal with them all, any buyer has a good many of things it has to get right for the ‘new business’ to succeed.

The ten reasons businesses fail

  1.  The business was started and run for the wrong reasons.Some companies are set up and then run more like a hobby than a business.  Lifestyle businesses tend to merely exist, not doing spectacularly, until something bad happens to cause the wheels to come off;
  2. I can do it all myself!In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical.  No one I know has all three, in the right degrees, not in today’s fast pacing business environment.  Seeking support from outside the business to plug skills gaps is a show of real strength, not weakness.
  3. Inadequate working capital.It always costs more than you’d expect to set up a business and survive the inevitable troughs later on.  It’s incredibly dangerous to rely on credit lines over which you don’t have full control.  Either way, the business owner didn’t properly assess how much money would be needed, where it’s best to get it from or what might happen;
  4. Weak financial skillsEvery business owner needs to understand how the business clicks financially.  If you don’t, you haven’t a business, you’ve got a hobby.  If you’ve got weak financial skills, there’s a good chance you probably also lack the profit motive, you love what you do and will return to stereotype ‘manager’ or technician’ roles when things get bad, digging an even bigger hole for yourself.  ask us to explain this;
  5. The location is wrongQuite simply, the business opportunity was not fully explored;
  6. Lack of planningThere’s a lot of truth in the saying ‘to fail to plan is to plan to fail’.   The unexpected does happen, particularly in our increasingly complicated world!;
  7. Over-trading (and what I call under trading)Over-trading / over-confidence can cause terminal cash problems in fast moving businesses.

    There is also something I call ‘under-trading’, where the business owner adopts a strategy of merely cutting costs to deal with their financial, operational and strategic problems – they do this because doing so can be the easiest decision and produces short term cash benefits.  However, we find that if this is all you do, you store up much more severe problems in the medium term.  It’s simply not possible to cut yourself to greatness!;

  8. Poor marketingThe Company waits for business to come to it, as ‘it always has done’.  The business could be ‘invisible’, there’s no route to the changing market, no sales force;
  9. Failing to follow a clear strategic directionOver time the business develops haphazardly.  It is slowly strangled by ‘unfair’ relationships with major customers, suppliers or employee groups;
  10. Inflexible business modelAn inflexible business model and high fixed cost base while they may work in boom times cause significant problems in the inevitable times of bust.

If your business demonstrates and of these, we can help… just call us on 01902 672323 now.

Top tips for ensuring a phoenix company doesn’t go the same way

Many phoenix operations fail.   It’s not that easy to make a phoenix succeed.

Trusting to luck or assuming things will somehow improve once the company’s debts are written off does not work.

Here are our top tips for making sure your phoenix business won’t go the same way…

  • You might find it difficult to get all the support you would ideally want from your bank, customers, suppliers or even key employees.  They could reduce the support they’re willing to give or even shun you entirely.  Insolvency is divisive, people tend to look after their own interests first and foremost: for example your customers could use the failure of the business to re-appraise what they do, how they do it and with whom.  You will lose some business, it’s inevitable.  Plan for the worst, hope for something better.  Ask yourself what support you need, and from where, for the business you want to create.  Then go get it, even if it means giving something away.
  • Although freeing a business of its debts deals with the symptoms of its problems, it doesn’t deal with the causes.  Identifying the causes for the problems of the business often means real soul searching.  You may need to bring in more help or resources.  You might need to improve your own skills.   You might need to stop doing something or start doing something differently.  Do you have all the entrepreneurial, managerial and technical skills, in the right mix, to succeed? – your business is only as strong as the weakest of your skills in these key areas.  Are you prepared to make all the changes you really need to?
  • There are major issues re-using a liquidated company’s ‘name’: not dealing with these in the best or proper way can lead to personal liability for the debts of the new business and a criminal record.  Do not ignore these rules, implement a properly considered plan for dealing with them;
  • Obtaining the right level of funding can be a real problem.  Some banks won’t touch phoenix operations on any terms.
    How much money do you need?  Add 50% more than you think, then ask yourself how you are going to get it?  Think about looking at alternative sources of finance, sources you haven’t considered before.  But be careful, sources such as Funding Circle get personal guarantees, and you could end up in even worse problems.

Only by fully investigating these issues with a firm interested in securing a long term solution rather than short term fee will you give yourself the best chance of things working out second time around.

Credit Union Insolvencies

I’ve been looking at the number of credit unions that have gone into formal insolvency over the last ten years or so.

I did this because I simply do not believe all the hype coming from trade associations like ABCUL and some individual credit unions’ marketing departments – you see I think there are major hidden problems in the sector.

The figures  speak for themselves – there’s no let up in the number going under! To me that is a concern when there remains a massive demand for credit union services and the government are saying they’re supporting the movement.

If Abcul and credit unions were more honest about the condition of the sector, perhaps the government would provide more, much needed, support?

By the way, credit union insolvency is a very specialist field.  If you are looking for some insolvency support, my advise to you is to shop around – you see not all insolvency practitioners have any experience in thsi field (however big they may be) and choosing the wrong IP is like marrying in haste – you will repect at leisure the day you make a quick decision.  So carry out a beauty parade of insolvency practitioners – ask them about their previous experience in the sector, get them to be very specific as to how, if you choose them, they will conduct every aspect of the insolvency – make them go into detail, don’t let them take  a broad brush approach, get into the specifics.

Perhaps you should also note that unlike all other firms, I do not charge my travelling time, accommodation or other travelling costs – this could form a big part of the eventual bill.  For you it’s dead money, no value is being delievered for it. You see, it is my policy not to charge these things because my view is if I choose to accept an assignment, wherever it may be, because it’s my choice, the client should not pay for it.  I also don’t charge for attending the board meeting at which the credit union’s board are considering their options, or for preparing a formal written report on their options.  Again something to think about.

 

If you’d like some support with your credit union, call or email me.  My mobile number is 07813 102014, it’s almost always on. My email is paul@midlandsbusinessrecovery.co.uk

Here’s the list…

2015 – 4 so far

Enterprise The Business Credit Union – May 2015; Derby United Credit Union – April 2015; Haven Credit Union Limited – March 2015; Castle & Minster Credit Union – March 2015

 

2014 – 5

Lower Iveagh Credit Union Limited – November 2014; Redcar & Cleveland Money Tree & Glen Credit Union – October 2014; Ballymacarrett Credit Union – October 2014; Glenard Credit Union – June 2014; Wantsum Savers: The Isle of Thanet Credit Union Ltd – 10 February 2014

2013 – 8

South Birmingham Community Credit Union Ltd (know as CommuniSave Credit Union) – July 2013; Carleton Credit Union Limited – June 2013;  Millom & District Credit Union – May 2013;  South Warwickshire Credit Union – April 2013;  Portadown Diamond Credit Union – April 2013; Marches Credit Union – April 2013; Severn Four Credit Union – March 2013;  Cornwall & Isles of Scilly Credit Union – February 2013

2012 – 6

North Yorkshire Credit Union Limited –  November 2012; Tamworth Credit Union Limited – September 2012;  Waltonian Community Credit Union Limited – August 2012;  Pallister Credit Union Limited – May 2012;  Hull East of the River Credit Union Limited – January 2012; Handsworth Breakthrough Credit Union Limited – January 2012

2011 – 8

Gallowhill Credit Union Limited – September 2011;  Lee Bank/Highgate Credit Union Limited – July 2011; Caribbean Parents Group Credit Union Limited – June 2011; Worcestershire Credit Union Limited – June 2011;  Southend Credit Union Limited –  May 2011;  Ilfracombe & District Credit Union Limited – March 2011;  South East Birmingham Communuity Credit Union Limited – January 2011;  Havant Area Savers Credit Union Limited – January 2011

2010 – 10

South Kintyre Credit Union Limited – November 2010;  Tower View Community Credit Union Limited – November 2010;  Three Bees Credit Union Limited – October 2010;  Landsker Community Credit Union Limited – September 2010;  Elswick and Cruddas Park Credit Union Limited – August 2010;  Hackney Credit Union Limited – July 2010;  Splotlands Credit Union Limited – June 2010;  Forest of Dean Credit Union Limited – May 2010;  Edinburgh Hackney Cab Trade Credit Union Limited –  March 2010;  Redcar and District Credit Union Limited – March 2010

2009 – 6

Derby City Credit Union Limited – August 2009;  Hull Northern Credit Union Limited – August 2009;  Eastbourne Community Credit Union –  July 2009; Irvine North Credit Union –  July 2009; St Brendan’s Credit Union Limited – May 2009; South West Durham Credit Union – May 2009

2008 -6

Polmaise Community Credit Union Limited – November 2008;  Khalsa (Bradford) Credit Union Limited – October 2008;  Inner Preston Credit Union – May 2008;  Peterlee Credit Union – March 2008; Rotton Park and Winson Green Credit Union –  March 2008; Edmonton Credit Union Limited – January 2008

2007 -8

Caia Park (Wrexham) Credit Union Limited – December 2007; Streetcred Credit Union Limited – October 2007; Corby Community Credit Union Limited – July 2007;  Ferries Credit Union Limited – July 2007; Fleetwood and District Credit Union Limited – June 2007; Clydesdale Credit Union Limited – May 2007; Skelmersdale Credit Union Limited – April 2007; L27 (Liverpool) Credit Union Limited – January 2007

2006 – 6

Breightmet Credit Union Limited – December 2006; Sheldon Credit Union Limited – November 2006; St Columba’s (Bradford) Save and Credit Union Limited – October 2006; Furness Credit Union Limited – September 2006; Money Tree Credit Union Limited – August 2006; South Airdrie Credit Union Limited – April 2006

2005 – 1

Greater Pollokshaws Credit Union Limited – June 2005

2004 -5

Hackney South Credit Union Limited – November 2004; Employee Credit Union (Luton Borough Council) Limited –  September 2004; Raffles Area Credit Union Limited – July 2004; Dalston Social and Business Credit Union – January 2004; Dudley Estate (Newcastle) Credit Union – January 2004

2003 -9

Ruabon, Cefn and District Credit Union Limited – October 2003; Croydon Branch Union of Communication Workers Credit Union – October 2003; Shepherds Bush Social and Welfare Credit Union – September 2003; Leicester City Council Employees Credit Union – May 2003; Leasowe Credit Union – May 2003; Tendring Dial Credit Union – March 2003;  Guide Post and Scotland Gate Credit Union – March 2003; Fairswan Credit Union – March 2003; Cathall Community Credit Union – March 2003.

Another (small) screw in the coffin of smaller community credit unions

A good many small community based credit unions have had a torrid time in recent years and probably right now aren’t seeing much of an improvement.  The Co-Op Bank’s decision to cut the interest it pays on its community bank accounts – such s their Community Directplus, Co-Operatives Directplu and Social Enterprise Directplus accounts – will prove to be another, small and slow, but certain turn on the screw in the coffin of already beleagured credit unions.

Small community based credit unions are really struggling – at best, they have seen flat income levels, at worst they’ve seen their income fall away, especially from grants and interest receipts.   Yet there is often little opportunity for them to reduce their overheads in line with the fall in income.  Trying to increase income by growing the loan book can often carry a disproportionate risk of bad debts so for some they have a stark choice – grow or merge or die a death of a thousand cuts.  The Co-Op decision will prove to be just another cut…

Let’s look at what the Co-Op is doing…

Interest rates paid on customer balances have never been lower, certainly not in my lifetime.  Until June the Co-Op will be paying a tiered rate of interest – Nil% on balances up to £1,999; 0.12%  on balances £2,000 to £9,999; 0.15% on balances £10,000 to £24,999; 0.18% on balances £25,000 to £99,999; 0.21% on balances £100,000 to £249,999; and 0.25% on balances over £250,000.

That’s to say the most the Co-Op will ever pay any credit union right now is one quarter of one per cent per annum… peanuts.

Yet those peanuts are being crushed!

The new rates from June 2015 will be: balances up to £24,999 Nothing, yes absolutely nothing – the Co-Op will get to keep your money for free!; £25,000 to £99,999 0.06% – a third of the already derisory amount it had paid previously; £100,000 to £249,000 0.09% – less than half it had previously paid; £250,000 to £499,000 0.18% – a cut of one third from the rate it had paid previously; over £500,000 0.25%, no change.

The message is clear… the Co-Op isn’t interested in supporting small organisations, it’s using you, the small credit union, to extract itself from its own financial difficulties … it doesn’t have the cohonas to abuse bigger organisations in the same way as they’re prepared to abuse you.

So it’s you, the smaller community based credit unions, and organisations just like you who will feel the brunt of this decision… it will be another straw on the camel’s back…

You see, right now, because you’re getting virtually nothing on the money you are sitting on and with additional grant income difficult to come by, the only way you can meet the regulator’s solvency targets might be by increasing the interest you receive on your loan book.  As you’re limited by law as to the maximum interest rate you can charge on the loans you make, this means you need to grow your loan volumes – the number of loans you put out and the amount you loan out.

The issue is you need to do this without increasing your bad debts.  Desperate people will go to any lengths – you will be lied to, some applications will be pure fabrication. How robust are your application procedures throughout your credit union?  You might get credit reports on potential new lending, but how reliable are those reports? – they are not as accurate as you’d hope!  And you probably can’t always rely on your longstanding members’ past savings history as an indication of their ability to repay any new loans – because people have so many ways nowadays of avoiding repaying their debts – not just the formal insolvency processes of bankruptcy, DRO, and IVA, and informal debt solutions such as DMP and DRO, but also pleading poverty in any debt collection process passing through the courts, and even disappearing.

It’s easy to see the situation whereby a credit union that’s already struggling with the the regulator could be forced into administration and then closure because of its bad debt experience and low level of bank interest income.