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Understanding insolvency and restructuring in retail and hospitality

13 July: the retail and hospitality sectors have been among the hardest hit by the lockdown measures. What are the warning signs for employees, suppliers and customers, and what can be done to prevent further closures? Liz Morrell reports.

Although retailers and the hospitality sector may now have mostly reopened, the economic fallout of the COVID-19 crisis means several high-profile brands have already entered administration, with some closing for good. Additional casualties are inevitable.

Understanding insolvency and restructuring in the retail and hospitality sectors was the subject of a webinar hosted recently by ICAEW, in conjunction with PwC insolvency partners Mike Jervis and Zelf Hussain.

The duo, who have worked on businesses including Laura Ashley, Mothercare and Slug & Lettuce said that pre-insolvency, various turnaround and restructuring tactics can be used. These can range from operational and financial restructuring that focuses on cash management and cutting costs to putting companies up for sale. Crisis interim management coming in can be another effective solution, particularly in family-run businesses. 

Beware of the warning signs 

But what if such tactics don’t work? “If the previous techniques aren’t working then you are going to see warning signs,” said Jervis. These can range from overdue balances to a lack of stock counts or stock discrepancies that can suggest management are trying to disguise problems. Poor quality in store and general bad PR can also suggest something is wrong. 

Three phases of decline 

Jervis explained there are three phases of decline before the point of insolvency. Firstly, underperformance, signalled by looking tired or losing business to competitors, followed by a state of distress where banks may be asking for information or management be changing. At this point, accountants may step in to carry out an independent business review.

In the final step of crisis, cash is constrained, and creditors may be taking action. “That contributes to insolvency as a company gradually loses control,” he said. 

Four common insolvency processes

Businesses must avoid running out of cash entirely by identifying problems early. There are various solutions available in the insolvency process, with newly introduced measures hoping to save more businesses impacted by the pandemic. Options include administration, new moratorium, CVA and restructuring plans before the final point of liquidation. 

1) Administration

Widely used in both sectors, administrations are used to rescue the company, ensure a better result than liquidation and make a payment to secured or preferential creditors. Directors can file a notice of intention which allows them to trade for a 10-day period but with a moratorium in place that stops creditors taking action against the company.

Pre-packs look to market the business prior to administration, identify a buyer and have a transaction lined up which is completed immediately upon entering administration. “This avoids the stigma of trading through an insolvency process, allows the new owners to start trading straight away and preserves value,” said Zelf Hussain. 

A rarer post-pack administration means a deal is also done on day one of the administration, but administrators still look for an alternative buyer in order to try to secure a better deal. In administration lite, currently being used by Debenhams, the company goes into administration but much of the authority and powers are delegated back to management. 

2) New moratorium

Part of the new Corporate Insolvency & Governance Bill, this can be used as an insolvency and restructuring rescue tool. Lasting initially for 20 days it provides the company with protection from its creditors allowing the breathing space to put a rescue deal together. 

3) CVA and restructuring plans

Pre-COVID CVAs were very landlord focused, used to reduce store or site portfolios. “I expect this process to be more widely used, as well as using the new moratorium process to put together a CVA and then exiting out into the CVA,” said Jervis. The new restructuring plan meanwhile is a new tool similar to the scheme of arrangements. 

4) Liquidation

Utilised for the closure of a business rather than its rescue. Again, there are several types here, from provisional to compulsory. 

“The COVID-19 lockdown and how businesses, particularly retail and hospitality, come out of that has changed the dynamic and thinking around how to deal with an insolvency,” said Hussain. Ensuring everyone recognises the early warnings signs and takes action will be more vital than ever as the full economic impacts emerge.

You can find out more or register to watch the full webinar by clicking this link.


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