Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Okay, well, welcome to the fifth in our series of Nightmare Scenarios Webinars. Over the next 25 minutes or so, we’re going to be talking about what happens when one of your key trading partners goes bust and with corporate insolvencies on the rise, this may well be something that you’re experiencing with some of your trading partners. It can obviously have a very serious impact on your business, either in the form of disruption to supplies or financial loss potentially. It may also present an opportunity for your business to acquire another business or a set of assets that you can integrate. So, there’s quite a lot to get through. I’m joined today by Colin Hardman at Evelyn Partners. Colin is a licensed insolvency practitioner and he takes appointments as liquidator or administrator or receiver of companies. And also delighted to be joined by Adam Bradley, who is a Corporate Partner here at Mishcon, with over 25 years of experience of working with insolvent companies and buying and selling businesses out of insolvency. My name is Radford Goodman and I’m a Partner in the Insolvency team here at Mishcon. If you have any questions during the course of the webinar, please pop them into the Q&A box that you can see down at the bottom and if you have any technical issues just post those into the chat and we’ll try and help. If we’ve got time at the end, I’ll come to some of the questions but if not, we’ll drop you a line and try to address any of those questions that we haven’t had time to deal with.
So, getting into the, into the meat of it then, if you’re worried about the solvency of one of your partners then there are some warning signs to look out for that might indicate that they are in distress. Obviously, later than normal payment, payments coming through or requests for extension of time, difficulties getting communications out of the company when you raise questions, implausible excuses for non-payment or late deliveries, drop offs in quality or service levels, sudden departures from senior management, late filing of accounts, market gossip is often something which those in the industry will hear about, reports in the industry press and even concerns expressed publicly by regulators or other authorities. So all of those things might be coming together to give you a cause for concern about a trading partner and if at that point you want to dig more deeply then you may well want to think about doing a search at the Register of County Court Judgements, maybe doing a search for winding up petitions, checking at Companies House for any recent filings or you may have rights under your contract to ask for additional information from the company.
Your Plan A may well be to try to support your trading partner through a tough period but if some of those warning signs are there then you should really start contingency planning for the worst because things can change very, very quickly, it’s a very fluid situation when a company is going through financial distress and even if they are confident of trading through, things can go south very fast so, at the very least be thinking about what you, what you can do to protect your interests. If you’re a buyer of goods and services from a distressed company then if those supplies are essential to your business, then you could be facing the risk of disrupted supplies and obviously contingency planning at a commercial level is going to involve thinking about how you can replace those supplies as quickly as possible from alternative supply lines. And obviously, if you’re a supplier to the distressed business, your concern is going to be different, it’s going to be around your financial exposure. If you’re a buyer, then you may well strategically want to support the business while you try and put in place those additional supply lines. If you’re a supplier, then you may well strategically be less inclined to support the business and more inclined to try and get your money back.
From a legal perspective, some of the questions that you’re going to be interested in, especially if you’re a supplier with a financial exposure are going to be the following. Should you be sending in a statutory demand for unpaid invoices? That could well get you to the front of the queue if the business is looking to continue to trade for a period while it’s trying to put in place a rescue or a restructuring, so that’s certainly something you should be thinking about. It’s cheaper and quicker than just starting normal litigation, the company has to pay you within 21 days but it’s only appropriate if it’s a debt that is not disputed. You might also want to have a look at your retention of title clause if you are a supplier of goods. Retention of title means that you retain ownership of the goods until you’re paid so, depending on the terms of your contract that may be a very effective way of either getting your goods back or achieving a cash payment in lieu. There are various hurdles you have to go through to enforce a retention of title clause so, again, it’s something you’ll need to start looking at, you’ll need to gather together all your contractual documents to try to work out what your exact terms are. Another thing you should be looking at is set off. You might have a right to set off under your contract. If you don’t, there might be a right to set off under the general law and in the law of insolvency there is also rights of set off. So if you have cross claims, if the company owes you money but you also owe the company money, then set off can be a very useful thing for you because it means that you get paid in full right up to the amount that you owe the distressed company.
We also often get asked about terminating contracts. That is something that is looked at when a trading partner is in distress. I think all I would say on that on a, on a high level webinar like this is, it is a seriously complicated area. It’s complicated at the best of times but when you overlay insolvency into the mix, there are special rules around terminating supplies at a time of insolvency that you need to know about so, getting it wrong can have serious consequences for you and open you up to liability and damages so that is certainly something if you are thinking about terminating your contract, certainly something that you need to be cautious about and take advice on.
Finally, another thing to look at is whether the distressed company may be holding money or assets on trust for you. That… if they are holding those assets or money on trust then that can assist you greatly because those assets or money won’t be available to be shared by all the creditors and essentially, you’re a beneficiary rather than a creditor. That can come up where the distressed business is an intermediary or an agent of some kind.
So, those are some of the legal issues that come up. You should also be thinking about your trade credit insurance policy, if you have one, if you’re a supplier of goods and be checking the notice provisions under there and also whether you, what obligations you’ve got to mitigate your losses. If the worst comes to the worst and the trading partner does go bust then there are lots of different types of insolvency procedure that they might go into and these can affect your business in a variety of different ways depending on which procedure the company goes into. So, I’m going to ask Adam now just to give us a high level introduction to the main types of insolvency procedure that are out there.
Adam Bradley, Partner
Corporate team, Mishcon de Reya
Well, thanks for that, Radford and since we’ve got 25 minutes in total, this will be a high, high level overview because this is a lengthy topic in itself but I’ll spare you most of the detail because actually for most, most stakeholders it doesn’t, doesn’t kind of matter in some ways, in other ways it does, this is very much a procedural area because for obvious reasons, you know the insolvency legislation is pretty detailed to safeguard all of the stakeholders, including the insolvent companies, potential bankrupts and so on. So there’s a lot of lot in it but then it comes onto a more commercial sort of aspect which we’ll come onto in a moment in terms of doing a deal with the administrators for, or liquidators, for businesses and assets, that’s a different thing. But to start off with, you know, you often here on the news that companies are bankrupt or the receivers have been called in or X, Y and Z is in receivership but actually most of that is incorrect nowadays because the concept of receivership, which was, you know, in brief, an old school, self-help remedy for secured lenders has kind of gone in most scenarios, it’s still exists for property type scenarios where you’re just looking to deal with one specific, normally a property asset but generally speaking, nowadays insolvencies are either administrations or liquidations. Ideally, the parties would look to administration first because it’s a, it’s a work out, it’s an attempt to salvage the business. Generally speaking, the deals that you see in the news where a business has been bought out, sort of phoenix type thing, which is used in a different context too but the ideal if something is bought back with a new lease of life, where some of the staff hopefully are preserved and this is what the IPs look to do and Colin can give a touch on that in a moment but where generally, there’s some life left in the business, albeit that it’s been, it’s been struggling otherwise it wouldn’t be in a process, obviously, but where there’s something to salvage, administration is a collective regime to try and work for creditors generally, to get something out of it. On the other hand, a liquidation, which can take several different forms, is basically a corporate burial type job. If you’ve got no, nothing else to do really, you kind of flog the assets off the best deal to realise money for creditors and paid out in a particular order. Again, that’s a separate topic in itself but the idea of a liquidation is kind of it’s the end of the road for the company and as Radford touched on a moment ago, it’s one of the remedies that you’ve got as a creditor if you’re persistently not paid by another business, you know, what can you do, one of which is to try and petition the company to wind it up and if you do that, that’s called ‘compulsory liquidation’, obviously an insolvent liquidation because that company can’t pay the debts as they forward you, so you go into court, you go through a process, quite a few hurdles to go through but in the end the judge might order the company to be wound up. The other options for that are compulsory… voluntary liquidation, which is creditors’ voluntarily liquidation, which again is insolvent, which requires the approval of the shareholders to do that or there’s members’ voluntary, which is a solvent liquidation, still requires insolvency practitioners involvement but where for example the company has come to the end of its useful life or it’s part of a tidy up of a group post a deal for example, that’s kind of an NVL, which is solvent and a lot lighter process but they’re all liquidations because the company doesn’t exist at the end of it.
And the final, final options are company voluntary arrangements and individual voluntary arrangements, obviously for individuals and this is what you see advertised on the radio and the television that you know, “I’ve managed to reduce most of my debts by 85%. Isn’t this fantastic”, you know, the means to do that is through a IVA, which have had varying degrees of good or bad publicity over the, over the period but it is a useful tool in the right circumstances and certainly for a CVA in a corporate context can work pretty well to work through an insolvency scenario with the aim ultimately to get something back to the company and to the stakeholders without going into one of the other processes but it’s still a formal process where an insolvency practitioner is required to supervise that process as the supervisor. Kind of the final other option, which isn’t a process at all, is an informal work out, where if you’re in a scenario where there’s a handful of mature and savvy creditors, it is possible to do informal workouts of your scenario, so I wouldn’t rule that out as a further option in certain scenarios rather than going straight to, straight to a process but these are all examples why you need to get some good advice earlier on from someone who can give you a commercial feel to it.
So that’s a very high level overview of the theory of it and I think, Radford, you can introduce Colin now to tell us how it’s really like.
Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Yeah, thank, thanks, Adam. Yeah, so I’m gonna, I’m gonna hand over to Colin now. As I say, Colin acts as a liquidator or administrator and can give us some insight into how he goes about fulfilling those roles and give us the view from someone who actually goes in and takes over companies that have had to go into that process and also, how they impact on trading partners. So, over to Colin.
Colin Hardman, Partner
Evelyn Partners
Thanks Radford. Just first I want to pick up on something Adam said with regarding compulsory liquidations. Quite often creditors… customers of companies in distress, the first, their first reference point is being aware of a creditor’s winding up petition. We quite often get involved at that stage to assist creditors in deciding what to do with that within our creditor services team, so that’s something which you should consider and support from Mishcon de Reya as well, so please consider at that stage what, what options might be available for you.
Just in terms of getting back to my role and what I do. I think going back to basics, on appointment, whether I’m appointed administrator or liquidator, it’s, it’s me as the insolvency practitioner who is in control, the directors’ powers cease, they’ve got a responsibility to assist me but I’m very much in control and we very much discourage creditors to keep contacting directors because that could have an adverse impact on the ultimate outcome. It’s us who should be communicated with. My principal responsibility is to act in the best interests of creditors, that is usually to maximise realisations for them, so I’m trying to sell assets as high as possible, higher value as possible, and minimise creditors. One way of minimising creditors for instance is, selling a business as a going concern, you have the creditors, the employees’ liabilities fall away because those liabilities transfer over to the new owner. So that’s high level responsibility for me. In terms of what happens next on appointment, that very much depends on the type of appointment. As Adam mentioned, there’s various types of appointments. In a compulsory liquidation scenario, we have got very little visibility on appointments because it’s, it’s a contentious, acrimonious appointment by the creditors, we haven’t got much knowledge about the company, its assets and don’t immediately have access to the records but we do ideally shortly after our appointment. So we’re very much dependent on the directors to assist us, that’s not often the, that’s not always the case and very much reliant on creditors to assist us in that regard as well. In other insolvency situations, we normally have better information so, if it’s a voluntary liquidation, as Adam explained, we’re normally working with the directors, albeit only for a short period of time with limited options because we can’t carry on trading in the liquidation. And in administration we, we more often than not have much better understanding of the company, its financial position and what the options are because we’ve been brought in by directors to assess what the options are, conclude that administration is probably the right process and decide on the strategy. Well, we’ll come back to strategy a little bit later.
The other aspect which we get involved with, which can be assistance with regard to recoveries is our investigations. We’ve got a duty to investigate anyway but within that we identify various actions which might derive value and, again, whilst we look to the company’s records and the directors to assist with that, sometimes it’s the directors who we’re looking at in terms of our concerns and again, very much reliant on creditors to assist with that. Shortly after our appointments we send out a questionnaire for creditors to complete referring to anything which might be of concern to them in terms of the actions of the directors. They can participate in a creditors committee and our appointment to assist us with fulfilling our obligations and duties, which might result in actions against them or others and just general support from creditors in assisting us with selling the business and assets and ultimately, making a dividend to creditors.
So that’s just a real high level overview of the things which an insolvency practitioner would get involved with and require the support of creditors.
Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Thanks Colin, that’s, that’s, that’s very helpful. So, I mentioned earlier that as well as all of the sort of downsides of a trading partner being in difficulties that it might also present an opportunity for you to purchase business and assets out of insolvency to integrate with your own business. So, I’m going to ask Adam now, what are the key considerations when you’re thinking about buying a business out of the insolvency and how should you proceed?
Adam Bradley, Partner
Corporate team, Mishcon de Reya
So, you’re first to say that, you know, there is opportunity from this that obviously insolvency by its nature is not an easy scenario for a number of stakeholders particularly, you know, members of staff etc but the positive side of it is, there are often deals to be, to be had for the business and assets, particularly out of an administration, where as Colin says, you know, the idea is to either to trade on and then do something or to do what’s called a ‘pre-pack administration’ which, as the name suggests, is you have a pre-packaged deal that’s basically drawn up prior to the administrators taking their appointment and, as I mentioned a while ago, there’s a lot of process and procedure that goes into this to tick the boxes to ensure that it’s all done correctly but once you get to the point of that having been done, the deal is a commercial deal like any other and, you know, it’s a corporate deal with a different flavour to it in as much as there are no sort of warranties or indemnities from the administrators, it’s the other way round, you know, you assure them that if anything goes wrong, you basically cover those costs, in a nutshell, unlike corporate deals where it’s the other way around, this is kind of buyer beware and the fire sale in its true, in its true sense. So, you know, what’s the secret to it? Well, any asset sale as distinct from a share sale, which most corporate deals are for tax and other reasons where you buy the entity and get it lock stock and barrel, here you’re buying the business and assets, which is whatever the assets are of that company, which could be goodwill, intellectual property, chattels, you know, office equipment, plant and machinery, you know, fresh fish, whatever the, whatever the business is, you know, there is stuff there that needs to be realised by the administrator and obviously if it’s fresh fish, it’s perishable and the deal’s got to be done even more quickly but there’s an element of some urgency to this so, to answer your question, what do you actually need to do, you need to formulate an offer and negotiate with the administrators. We’re not talking about liquidation sales here particularly, where it’s just a sale of the affects more or less on a, on a sort of glorified invoice basis but something where there’s something that’s a moving parts with staff that will transfer over under the legislation, you know it’s a going concern etc, so it’s a lot of more of a dynamic thing but there is limited time in which to do it for fairly obvious commercial reasons given the interplay with other parties, right. So, I think what you need to do as a potential buyer, once you’ve got wind of the offer, and everyone gets wind of insolvencies through you know their own trade business or other contacts or advertised in the business by the insolvency practitioners with due process, then you need to formulate an offer as quickly as you can and have a commercial negotiation with them, with a view to getting something out of it which keeps the, particularly the secure creditors sufficiently happy. So, that’s what you really need to do but act quickly is the main key.
Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Thanks Adam. So, so, Colin, from your point of view as someone who is, who is the, the seller of a business, when you’re running a competitive sale process, what are your, what are your key considerations from your point of view?
Colin Hardman, Partner
Evelyn Partners
Sure. Obviously, very little depending on the circumstances but broadly speaking, the key things which we need to consider are, is how long do we have to sell a business once we’ve got involved? That varies considerably. Secondly, marketing the business, we need to market it as widely as possible to achieve the best sale and once that sale process is completed, the marketing to proceed to finalise a contract as quickly as possible with the preferred, preferred bidder. And finally, to communicate the reasons for rationale of the pre-pack to creditors, given it happens very quickly and as a surprise to most, if not all creditors in those circumstances. And the best way to give you a little bit more clarity on that is to give an example of a pre-pack I did a little over a year ago of a furniture retailer. The company had struggled for various economic reasons for twelve months after two or three years of great success, principally suffering from the macro-economic climate with Ukraine in particular. We were approached early December after the company had had a failed equity sale grind to a halt in late November and were considering its options so we looked at those options and given the company was unprofitable so, there was no prospect of it carrying on trading in administration and given the cash it had, we concluded that the company had no more than three weeks to complete a pre-pack sale process, which is a very, even my world, that’s a very limited time period to achieve a pre-pack but you’re given that time period and you have to work with that time period. We, we managed to extend that a little bit by, by discussing the situation with a number of its key stakeholders, now that could be, that could be a creditor and quite often is a creditor. The two in particular in this case was, was the bank, we actually managed to achieve a longer runway to complete a pre-pack because they, following us providing them with a cashflow forecast, we showed to them that if they provided some further funding so we could trade over Christmas, given it was furniture retail, Boxing Day was a key date that they would have a better outcome and not only for them but for creditors as a whole so, we preferred to get some further support. So, key takeaway there is we do consult with key creditors. Another key creditor was the warehousing and distribution providers. They were key for us to carry on trading so that we could release goods to sell, so we came up with terms which were agreeable to both, both the company who we were advising, and themselves.
The next phase is to get on with the actual sale process and we have to widely market to the outside world as we can. We do that with, in consultation with the directors. They know their market, they’d obviously been in consultation in this situation with, with certain parties to sell the company and equity sale but we also reach out to, to our corporate finance team, we advertise it online and we, we just consider as far as possible who might be interested. That can quite often be sensitive to directors given the publicity but we, they just have to accept it, to be frank.
The next phase is to make sure that we get offers in quickly so, we obviously have a data room set up in this situation, a data room had already been set up, a virtual one, for the equity sale and then we proceed to getting the offers in and there’s usually a period of time where there’s a bit of negotiation following accepting an offer, we make it very clear as to what the requirements are, which can be very specific and different from an equity sale, we don’t give representations or warranties, we don’t give any guarantees with regard to there being no tax liabilities for instance. And ideally and usually, we, we complete a contract fairly quickly. In this instance we did in the time period for continuing to trade before we had any concerns over wrongful trading for the directors.
And finally, particularly with a pre-pack, we notify creditors as quickly as possible, we have to do it within seven days and we set out the reason why pre-pack was appropriate, we explain the marketing process and conclude and explain why it was the best offer. So that’s, so that’s my process in a nutshell.
Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Thanks, thanks Colin. Look, I’m conscious of time. We, we’ve used up our 25 minutes. I’m just going to wrap up by asking Colin and Adam to give us maybe one or two key takeaways for today and, and then I will, and then I will bring the webinar to a close. So, maybe if I start with Colin, one or two key takeaways please.
Colin Hardman, Partner
Evelyn Partners
Yeah. I think my two takeaways are, I just refer back to what Radford said in terms of just keep an eye on your, you know, keep an eye on your, your customers and keep a rapport with them going and also at the same time, if you do have concerns, seek advice from your professional advisors, be that Mishcon de Reya or Evelyn Partners or whoever. And secondly, just, just be aware that the proposed and subsequent administrator or liquidator can support you, they’re trying to work something through now for the best interest of creditors, that’s as a whole but they’re trying to help you as well and there might be circumstances where they’re trying to negotiate with you and keep an open mind with regard to that.
Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Thanks Colin. Adam, one of two key takeaways?
Adam Bradley, Partner
Corporate team, Mishcon de Reya
Well I think echoing that really. I think, you know, as a potential buyer of the business and assets, you should view it as an opportunity to get something out of it and you know to do things at times for the sort of greater good for the people and staff employed etc, etc and the secret to it really is formulate an offer fairly quickly, come up with something fairly sensible that’s not, that’s not going to be just rejected out of hand by the administrators and that can include obviously cash payment for various assets but the assumption of liability as well, which is a key part of it at times, and also there’s the scope to do a deferred deal, so you’re not paying it all up front with the sort of smart deals as to you know royalty type payments going forward or earn outs, you know it is possible to do that with sufficient safeguards in place and, you know, the administrators are commercially focussed guys, they have a lot of skill in terms of going through process and their legal knowledge but ultimately, the administrators and liquidators are deal doers and want to get something out of it for the parties that they ultimately represent. So, you know, be open-minded as I think Colin’s just said and see if you can get something out of it.
Radford Goodman, Partner
Insolvency & Restructuring team, Mishcon de Reya
Well, look, thank you so much for joining us. We have had some questions in the Q&A. We are over time so, we’re going to get back to you separately if you’ve, if you’ve posted a question, we will get back to you. But all that remains for me is to thank both Adam and Colin and to thank all of you for joining us today, I hope that’s been helpful and useful and we look forward to seeing you at the next webinar. Thanks.