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.

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

Don’t judge each day by the harvest you reap…

Hello

It’s been a good while since I last put my thoughts into a newsletter… sorry, I’ve been incredibly busy.

And do you know why that is?

… I’ve been taking some new technologies by the scruff of the neck and integrating them into my business – and it is that, rather than a glut of insolvencies (I wish!), which has been taking up my time.

The title of this newsletter is the start of a quotation by Robert Louis Stephenson, it ends with …. ‘but by the seeds you plant’.

I’ve been planting a lot of seeds.

You see so much is happening out there on the new technology front, great stuff that could be integrated into my business, that I’m going to be making it the subject of several of my next few newsletters – you see there’s a chance that you, or the people you know, could benefit from my triumphs and my pain (some of my seeds fell on barren ground).  My newsletters will be in the nature of both observations and tips.

So why, when there are a lot of other important things that I could be doing, did I decide to focus on new technologies and for so long?  These are the first of the observations – my why.  Because you might just share some of them.

The first reason is

… the pace of change in technology – and thus in me maintaining my competitive edge (just how important is that for a small businesses?) – has accelerated massively in recent years.  And it’s only going to get faster.  I simply had to invest my money and time here if I wanted to maintain my lifestyle and retain the control I, and not others, have over my life.

The second reason is

… by bringing me into regular contact with people outside of my profession and normal sphere of operations who are great at technology, some of what they know and do rubs off on me such that by doing different things and the same differently I get to create my own opportunities to win some fantastic new ‘quality’ business that would otherwise be invisible to me.  Unless I do this unpaid r&d type work exploring the new technologies there would be no high margin work – I’d be scrabbling around doing the low margin work my competitors do.

The third reason is

… in the past if a business were not to embrace new ways of working or new markets, most of the time it would only hurt them slowly, over time.  Nowadays, I don’t think that it is always the case, the pain caused by ignoring new technologies and ways of working is acute, sharper and quicker to come on, it’s not chronic.

The fourth reason is…

… Having low overheads means I have both the time and resources to make it my focus.  This is the first instance of being in the right place at the right time, it’s luck, and most others do not have this luxury.  It would be negligent of me if I didn’t take advantage of this massive commercial advantage.

The fifth reason…

… my nature and a lack of accountability.  This is where I’m lucky again.  As a member of Generation X, I didn’t grow up with a mobile phone in one hand and a rattle in the other so technology isn’t something that comes easy to me.  But unlike most others in my peer group who have targets to meet, are accountable to someone else, or need to maintain an aura of invincibility, I am prepared to make mistakes, Lots of them!

Here are a few questions for you…

  • How important to you is getting a good grasp of new and emerging technologies either in your business maintaining or gaining a competitive edge or in you maintaining your lifestyle?
  • Do you share any of my 5 own personal reasons for this focus? Or do you have your own compelling reasons?
  • Are you and your business where you need to be in order to attract in the sort of opportunities you really want?
  • Should you be spending your time with a different set of people/organisations to gain a different mindset?
  • What new, high margin, products or services could you create by adopting technologies borrowed from outside of your sector?
  • What’s your attitude to spending, even potentially wasting, money or time on this sort of thing?

I have a request… quite an important one…

It’s partly to do with GDPR, it’s partly to do with me measuring how effective my newsletters really are.  I’m having a massive clear out of my circulation list.  I shall be deleting all the contacts my system is telling me aren’t regularly reading my stuff.  So if this is you, or if you read from mobile (my systems don’t always recognise you’re opening things), but you still want to receive stuff from me, please email me separately asking to remain.  If you’re a new reader and aren’t yet receiving my newsletters direct, but would like to, click on the following link to subscribe.  Click here

Finally, because sometimes life is just too serious, do you remember this classic comedy sketch about new technology? Ronnie Corbett and Harry Enfield in the greengrocers.

Fantastic!

Hope you continue reading, and if you have any insolvency business, I’m still here!

All the best

Paul Brindley
Midlands Business Recovery
T 01902 672323
M 07813 102014
paul@midlandsbusinessrecovery.co.uk

The importance of luck in all of our lives

 

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The picture above is of me and three friends and a guide at the top of Kilimanjaro about ten days ago.

36 hours after this photo was taken we were in a sports bar in Arusha, the nearby city.  Kilimanjaro and Arusha are in Tanzania, one of the poorest countries on the planet.  After our 8 day trek we were desperate for a few beers.  Standing there in a decrepit bar that hadn’t seen a lick of paint in 40 years in a mud street way off the beaten track, underneath a house of ill repute, next to a butcher’s shop where every order came with ten free flies, we were far away from ‘our normal’.

Being the only mzungus (while guys) the bar had seen for years, we were ill at ease, at least at first.  The first game on the tv was between 2 local professional football teams, Yaf v Azam, it seemed to them to be an important game, the bar was buzzing.  Then the Watford v Arsenal and Everton v Man United games came on. A few more beers later, the international language of sport broke through the language barrier leading to some great interaction with the locals, and their English was a hell of a lot better than our Swahili (in fact English is the Tanzanian second language).  The boundaries disappeared – there really isn’t that much of a difference between us mzungus and the local Chagga tribe after all.  Not that that should have surprised us, a week being supported by such hard working, ever smiling Chagga porters and guides should have told us that would be the case.   Normally on our trips we enjoy the challenge of self guiding and we go light, carrying our own kit – but to go up Kili you are obliged to use local labour – to maximise the money put into the local economy – and we are glad we did, the 4 of us provided work for 22 people for a week.   And we were now doing our level best to keep the local brewery and bar solvent!
You may recall from my last newsletter that I’ve been dipping into and out of a book by Nicholas Taleb called the Black Swan – he talks about the massive impact, beneficial or not, of the highly improbable unforeseen event.  There we were in a bar where our presence was highly improbable getting on great with the regulars.  It certainly had a major effect on our and we hope the locals’ minds.  Outside of ‘our normal’ was good, it was expansive.
In his book Taleb also talks about the ‘Matthew Effect’ – about how those with a slightly higher skillset than the norm (for example footballers slightly better than Sunday league status), better resources or education enjoy ‘consistent cumulative advantages’ – they experience massively higher income.  The reason he cites for this is our living in a ‘winner takes all’ society.  Taleb claims this applies equally to countries, companies and individuals, for example those starting off with strong infrastructure, a good education, a good level of level of resources/cash do far better than those less lucky.  Taleb makes the point that the richer seem to get richer, the big get bigger, the poorer stay poor, the small tend to stay small, and the difference between the extremes gets bigger over time, largely because the bigger, stronger attract more opportunities and are better able to capitalise on them.  And people will pay more to the bigger/stronger/more successful.

 

That is what we were seeing right before our own eyes, every day, in Tanzania… you see the people took education very seriously – and English was a high priority – and they were trying to improve their infrastructure, for example by upgrading the local A road – yet 99% of the people we saw remained incredibly poor.  This is possibly best demonstrated by the daily rate for a porter – and by golly they work incredibly hard – the daily rate is just 5 US Dollars.  Another example is the various bars we went into, where we spent just $1 a pint (a decent pint at that) with the owner treating us like kings for having bought a round each and throwing in a few dollars in tips!  The problem for most businesses was a combination of low prices and the low frequency of transactions because they started off ‘poor’ because of the Matthew effect.
And yet when we looked at them, the people in Tanzania weren’t really that much different from here in the UK.  They just happen to be poorer than we were by an accident of birth.
It was surreal standing there watching professional footballers paid hundreds of thousands of pounds a week, when the locals barely make $50 a week.  Yet they didn’t complain nor draw any adverse comparisons.
This got me thinking about this winner taking all thing.  It applies in all sports, it also applied in real life there, and it applies here at home.   Here, right now I’m seeing some big companies benefit massively from the Matthew effect…  they have more resources, they seem to be better able to control their destiny, they negotiate from a position of strength, they leverage the goodwill of others, …  and even where they make bad decisions – and they do – they just seem to be better able to get away with them.  They seem to make a lot of money very easily.  Meanwhile, smaller UK businesses, like our porters, eke out a living even if they provide an exemplary service and work incredibly long hours.

 

But it’s worthwhile remembering that nothing is forever, ‘everything will pass’.  Look at any stock market in any capitalist country and track its members over say a thirty year period… you’ll find that only one fifth of those companies in the market at the beginning are still there at the end, the four fifths will either have reduced in size and thus dropped out or gone bust, to be replaced by new and upcoming businesses.  The same applies with countries, cities and regions – what makes you think the UK, Birmingham or the Black Country are immune from the catastrophic falls from grace suffered by any of the historical giants to have fallen from grace such as the Egyptian Empire, Rome etc?   It’s foolish to think that we’re somehow cleverer than our forefathers, that somehow we’re ‘special’ or immune and such a decline will never happen to us.
There’s a phrase that’s oft quoted in trading circles – ‘the trend is your friend…. until the end’- and that’s the point, you are only safe to assume the trend will continue until it’s no longer safe to do so… you just don’t know when that may be.  It probably won’t be today, it might not be tomorrow, but you can be sure that the trend will break at some time.  And from what I suggested in my last writing, that event is unpredictable as to timing or impact.  Let me ask you readers in the Black Country a question – did you see Caparo’s administration coming?  The firm seemed to be part of the local fixtures and fittings, with an experienced management team.  I didn’t see it coming.  In fact after its failure I looked up its credit rating using the expensive business information system I subscribe to and they didn’t see it coming!  I guess like the credit rating agencies vis a vis the banks in 2008.
In my game I see a lot of people who have gone through either personal bankruptcy or company failure.  Taleb argues in his book that good fortune follows those who started off in a privileged position, and bad fortune follows those who don’t start off in a privileged position or for whatever reason experience significant misfortune – it’s almost as if good luck breeds more good luck, bad breeds bad.  I often see people who are hit hard by three things at the same time, but to me, it’s not as simple as Taleb suggests, people often do bounce back from misfortune, some very well indeed.  What I find is regaining that successful streak after any formal insolvency depends on a combination of variable factors including support from family, friends, and others; health; the availability of resources; the willingness of others to offer up opportunities at times of need; and getting your head right.  Taleb says that most people tend to overestimate the impact on them of bad things happening like bankruptcy or business failure – perhaps people at a low ebb struggle to anticipate help being offered – and I find that women tend to be more adaptable than women.  Where I do think Taleb could be right is people are happier where they experience a consistently good  level in their income, rather than large swings with large profits one year offset by slightly smaller losses the next year.  Perhaps the people of Tanzania are happy with what little they have because at least there’s some degree of consistency?

Here are a few questions for you:

How much of your own personal success do you attribute to the Matthew Principle?  Who do you thank for that?  Do you thank them enough?
How much of your success you do attribute to luck and how much to hard work? (Taleb argues there’s far more luck in business and life in general than people give credit for)
Now ask yourself the same questions about the people around you.  What does that do to your views about them?
Could you do anything to make your income more consistent, year on year, even if it isn’t spectacular and doing so means dropping some other more exciting opportunities, clients or customers?  Is it worth considering?
Are you treating a local supplier unfairly – say by screwing them to the floor in terms of price?  Remembering that nothing is forever, how’s that going to help you long term when they fail or walk way from supplying you? (I’ve heard numerous stories straight from the horse’s mouth of the worm turning!).  Is it time for a change of heart?
If you work for a large business, can you better use your buying power to do more for the local economy, either in terms of allowing sustainable price increases or increasing the frequency of local purchasing?  Are you using a large firm outside of the area simply because you find it comfortable sticking to the beaten track?  Would giving a small local business an opportunity to show what they can do stretch your mind?
Who do you know would appreciate a leg up because they’ve suffered some misfortune?  What’s stopping you from helping them out?  How would you feel if you gave them that leg up?  How would they repay that support?
Who’s next to fail as a result of the factors that led to Caparo’s demise?

By the way, I’m asking people to donate  to Katherine House Hospice in Stafford for the Kili climb – it was tough – if you would like to donate, here’s my Justgiving page – Here

Paul Brindley
Midlands Business Recovery
T 01902 672323