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.

Do you investigate everything you really need to when a prospective customer approaches you?

This is an unusual question for anyone to ask, after all we are all grateful when a potential new customer approaches us.  So why am I asking this question now?

Many businesses are going through a period of massive change… old style business models are being replaced by what appear to be leaner, faster moving, sometimes digitised models that involve using the services of people and companies you’ve not used before.  Companies are outsourcing more, they are sending goods and services out for external processing by specialists, before sometimes getting them back for further processing – in the past companies often tried to do everything in-house, now it is generally recognised that doing so is a massive mistake, no company whatever its size can hope to have all the skills and resources to keep all aspects of their operations at the cutting edge in an increasingly complex and fast moving world.  We are all being asked to do more work by companies we have never heard of before.  So what’s the problem?

The problem there is no past history of working with that company, and increasingly I’m seeing companies – particularly engineering companies – who are outsourcing to specialists, closing down some or all of their own departments.  And that brings massive risk to the company that accept such work… especially as I have seen several times in recent weeks those companies looking to outsource appear to be very close to insolvency and are merely supplier hopping, leaving a trail of unpaid debts behind them which, if you accept such work, would put the very existence of your business at risk.

So here are a few questions for you to ask / things for you to do before you take on a new customer / client:

  1. Why is the customer looking to use your services / outsource? Really dig down deep on this…is it for valid reasons that should stand the test of time or is it merely an effort to stave off cash flow problems, to get you to do work for which you will struggle to get paid?
  2. Why you?  Why not someone else?  What’s so special about you?  Is it merely because they see you as a easy touch because you need more work?  Or is it because you and you alone have the skills they really need?
  3. Why have they closed down their own department who used to do the work you are being asked to do?  Was it because they lost or made redundant the staff in that department (if so, why?), was it because they couldn’t properly manage the department or manage or control the work flowing through it? (in small industries or in a small area like the Black Country it may be possible to ask former staff for the real reasons, don’t be afraid to seek them out, either using your contacts or even social media).  Same for any previous supplier of such services, do you know who they are, can you speak to them?
  4. What do you know about the prospective new customer’s contract with its customer?  Does it enable such outsourcing?  (I’m seeing instances where work is being passed out where the contract specifically prohibits doing so – this is a very real warning not to get involved because the ultimate customer as and when they find out will not pay, and that means you will probably not be paid either, they will argue that the reason they are not getting paid is your fault).
  5. What do you know about the customer’s history and its finances and its directors’ / senior management’s history?  Do in-depth searches on them.  Not just cursory credit searches.  Do they habitually leave a trail of subcontractor destruction, liquidations or administrations behind them?  Are their finances strong, or not?  – And actually look behind the figures, don’t take them on face value – I’m seeing groups who have recently liquidated subsidiary or associated companies in order to jettison large levels of external debts (this could be you next time they do this!), where their failures will have a massive knock on effect on the remaining group companies which are not reflected in the  accounts or credit ratings – they have delayed filing their current accounts  to hide their true financial position.  Who are the customer’s external accountants / auditors – are they reputable or could they be working closely with their client to orchestrate the eventual failure and rebirth of the business (after writing your debt off)? – again, I’m seeing evidence of this…
  6. What’s the rumour mill saying about them?  Are there any murmurs of under-pricing, suppliers not being paid on time, fabrication of reasons not to pay, non-deliveries, resignations, sudden changes in staff/suppliers, etc?
  7. Who can you talk to whom you can trust, if anyone, to satisfy yourself as to the customer’s motives and reliability?  If they have been involved in any recent failures, pull down the statement of affairs, talk to the suppliers you know who have been left behind.  Think about others – customers, employees, advisers.  If there is no one you can talk to, then you might think about not accepting the work.
  8. Think about what’s the worst that can happen?  Then budget for it because there is a good chance it will happen… would it take down your business or be something that you can simply put down to experience?  What ‘hold’ if any do you have over the customer os its directors once you have started to do your work?  Should you be asking for a personal guarantee from the customer’s directors?

Right now I am seeing good businesses being put at massive risk by unscrupulous companies – yes, as much as it hurts me to say it, by Black Country businesses – who appear to be following the Carillion example of massive subcontractor abuse.  Make sure it’s not you who suffers as a result… and if you are an accountant or lawyer whose client has been asked to take on a big contract which might hurt them if they’re not paid, why not ask me for my thoughts? – it might just be the difference between you losing a client or your client going under themselves, or not.

Beware the precise wording of insolvency practitioners’ letters of engagement!

Beware the precise wording of insolvency practitioners’ letters of engagement!

When you as a director approach an insolvency practitioner for advice and support in connection with your insolvent company, the IP has to provide you with a letter of engagement.  The purpose of that letter is to set out:

  • Your legal responsibilities as a director
  • The legal processes that need to be followed to put your company in to CVL / Creditors Voluntary Liquidation (or similar), and in the period immediately after then (including the creditor decision procedure)
  • What the IP’s duties are and what you will do to help them fulfil those duties
  • How the IP gets paid
  • A good number of other things the IP must point out either because his governing body or law require him to do so.

The prime purpose of such letters is to ensure you and the IP both know exactly where each stand.

But do you really know where you stand?

I’ve been approached several times recently by directors looking for a second opinion, a different set of eyes, after they’ve taken advice from bigger firms of IPs.

And they brought with them the IPs’ letter of engagement… which in my view was impossible for the directors to fully understand because the letters were incredibly long, detailed and complicated.  But it goes further than that… a few words amongst the ten pages – which were explained erroneously by the work getter in the IPs’ firm – would have had a major impact on the directors.

Let’s explore this…

The basis of the IPs’ fees were explained in the letter – they would be paid an agreed sum for the work they did up to the date the creditors decide whether or not to allow them to carry out the liquidation, and then once their appointment was confirmed their fees would be agreed by the creditors, or in another way which the directors / shareholders had no input into.  Quoting one such case, £5k plus VAT, ie £6k up to the creditor decision date, but no figure estimated for their post decision fees.

The letter in that case said that ‘in the event that the assets of the company are insufficient to discharge our fees, any shortfall will be paid by the directors of the company personally.  The signature of the enclosed copy of the letter of engagement letter by the directors shall be evidence and confirmation of your joint and several guarantee of all monies owed to us’.

Tell me… how much have you guaranteed?

Nothing, because you hope the IP realises at least £6k.  £5k, the figure before vat (can the IP claim back the vat?)? £6k?  £10k?  £20k? More?

The point is you don’t know, you have no idea?  Did you notice the word ‘all’ in the last few words of the quotation?

Because of this you are guaranteeing the IPs’ entire fees, including that post the creditors’ position.

And you have no control over the his fees or the extent of his work post creditor decision – here his fees will probably be calculated as follows:

    1.  At his rate per hour per staff grade – you have no control over
      -what grade of staff they get to do what;
      – whether he asks the creditors to enhance his rates (he can do so under Insolvency Law if he thinks his work or the circumstances of the case make it appropriate he’s paid more) – and it’s the creditors who get to decide, not you; or
      – by how much he increases his charge out rates each year – you only know his current charge out rates – and as you will see, they are hefty)multiplied by
    2. The number of hours spent – post creditor decision, you have no control over:
      – what work they choose to do;
      – What complexities are caused by others, such as creditors, employees, HMRC etc
      – how many hours they spend;
      – how long the liquidation takes (the longer it takes generally the more time is spent).

All you know is it’s a minimum of £6k plus the reasonable fees of the IP post creditor decision date – work on at least double the £6k figure as a bare minimum.  In reality by signing the letter of engagement you’re signing a blank cheque in favour of the IP.

So was that explained to you?

No it never is – it’s always explained that you’re guaranteeing the IPs’ fees only up to the decision date, his costs after that are conveniently ignored, never raised with you.

And that is why it’s often a good idea to get a second opinion, even if you’ve been introduced to the IP by someone you trust such as our accountant – because the person who introduced you will simply not know about these issues, you’re putting blind trust in your adviser’s recommendation, blind trust that could cost you dearly.

If you would like to arrange a meeting for a second opinion, call me on 01902 672323.

Twice in 2 days!

I see this a lot…

But twice in 2 days!!!?

What am I talking about?

Small business owners with a company that’s really struggling financially, where there is no option but to close, who have been to an insolvency practitioner who has advised them that:

  1. Creditors’ Voluntary Liquidation is the route to go.
  2. They need that particular firm of IPs to carry out that CVL.
  3. The director(s) / owner(s) of the company need to personally pay for the liquidation, in one instance using the services of a company who will put in their redundancy claim to the RPS then send the money to the IP, in the other, just out of money they must go away and find!

This is appalling advice from the IP.  It’s aimed at one thing only, and that’s earning themselves a fee.  It’s nothing at all to do with providing the best advice to the client.

The point is when any IP is first consulted, our prime duty lies in providing the best advice to the person who has come to see us.  Sure that changes if we are subsequently appointed as say liquidator, but right there and then at that first stage our prime duty is owed to the person sitting in front of us.  And that means not trying to feather our own nest to the exclusion of providing best advice to that person.  Yet it happens… often…

Read this article if you have been asked to personally pay the IP’s costs – Click here.

If you are seeking best advice, either first time (you’ve not yet seen an IP) or second time because what you’ve been told by an IP simply dos not sound right, then call and come and see me.  The initial meeting is free, even if it’s just a second opinion you are looking for.  Why not take a second opinion if you have already taken advice from an insolvency practitioner that just does not sound right? – because after all the decisions you are making now are very important and once acted upon can often not be undone.

My number is 07813 102014.  And the phone is always on.

Paul Brindley

Insolvency practitioner covering Dudley, Wolverhampton, Walsall and the Black Country

insolvency practitioner based in the Midlands

Examples of instances where directors have been disqualified

 

For what reasons do UK directors get disqualified?

This article follows on from my earlier article on director disqualifications to give some idea as to what sort of conduct the authorities consider are worthy of disqualification.

Here are some reported examples of where directors have been disqualified (click on the links in this article to be taken to more information if you should need it)…

 

Alleged fraud!

An orchestrated attempt to defraud HMRC through the creation of a number of companies to obtain illegal VAT refunds – a blatant fraud on HMRC .

Carousel VAT fraud

Misleading investors

Misleading of investors and misuse of their money

Fresh air invoicing to obtain finance from a bank

Under recording of cash sales resulting in incorrect vat returns being submitted and the non payment of vat

And another similar case!

Vat evasion

Tax evasion

 

Not doing the right thing in their company at a time of insolvency

Removing assets from the company for their own personal benefit

Unexplained transfers of money out of the company  and accepting money from customers for goods/services not provided

Payment of illegal dividend  and transfer of funds to an associated company

Diversion of money that the company was entitled to into the director’s own bank account

Transfer of large sums of money to themselves 

Another case of transferring large sums of money out of the company to companies they controlled

Using money from the sale of customer assets for their own purposes

Selling company assets for personal benefit

Once a company is either known by the directors to be insolvent (or where the directors should know it’s insolvent), it is vital that the directors don’t do anything that is clearly not in the creditors’ interests.

Perhaps these disqualifications could have been avoided had the directors taken advice from a licensed insolvency practitioner at the right time (and followed that advice)?

 

Failing to do the basics/comply with laws applying to the ongoing business!

Failing to keep proper books and records to explain the company’s transactions

Misusing company funds for their own benefit 

Another case of misusing company funds for own benefit

Breaking the law on an ongoing basis

Failing to report conflicts of interest

Another failure to comply with the law applying to their business

Acting as the frontman for a person who is banned.

Not doing everything they needed to do to protect vulnerable members of the public

Failing to put in correct tax returns

Breaches of the Privacy and Electronic Communications Regulations

Unfair trading practices and failure to repay the public on a timely basis 

Breach of a previous ban, including the banning of the disqualified’s frontman

Failure to comply with environmental laws

Failure to maintain proper books and records

Breaking the law by employing illegal foreign workers

 

Other reasons

A series of formal insolvencies each with the same pattern

Come back here often, I will keep adding examples.