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.

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 an 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…

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

Been asked to personally pay the costs of liquidating your company?

A day doesn’t go by without me seeing at least one instance of a director being asked by an insolvency practitioner to personally pay the costs of putting their company into creditors’ voluntary, ie insolvent, liquidation.

If this is you, here’s a few questions for you…

What’s the insolvency practitioner said about your responsibility for paying those costs?

Were all of your options explained to you?

The answer to these questions is typically ‘not a lot’ and ‘I don’t know’, all that was said is ‘a CVL is quicker and more convenient way for you to close down the company’.

It might be, it might not be, but let me ask you another question, and this is the knub…

Can you do something better with your money – typically £2,500, £3,000 or £5,000 – like finance your new business, pay down personal debt, or even take a well earned break – than pay an insolvency practitioner’s fees?

Of course you can, because whatever way you look at it, spending your hard earned money – and I’m even seeing directors who go into personal debt on credit card to pay such fees, even after losing their sole source of income – on dealing with a historic issue isn’t great value for money.  Yes, there are low cost alternatives to a formal insolvency process.

So why is this happening?  Why am I being told that CVL is the best option?

Well, there are 2 reasons.

Firstly, insolvency is a incredibly complicated and grey legal area, it’s ever so easy for an insolvency practitioner to say ‘a CVL is the right route for you’ without that statement really being put to the test.

Secondly, many insolvency firms depend on selling directors what I would argue are bad solutions to survive themselves – unless they pile small CVLs high and sell them cheap, the insolvency firm would itself be bust!

It is time for some uncomfortable truth...

There is nothing in the law that says any director has to use his/her own money to personally pay for the liquidation of their company.

Let’s repeat that so it hits home…

There is nothing in the law that says any director has to use his/her own money to personally pay for the liquidation of their company.

You see the law only says you have to stop making the creditors’ position any worse.  Sometimes you can do that by simply ceasing to trade.

But there’s a problem…

You still you need closure.  You need to close down the business and the company.

The secret that many IPs would like to keep from you is that can be achieved without you throwing your own money down the drain.  Ask us how you can do that.