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Building the path to recovery following the Carillion collapse

The staggering collapse of construction firm Carillion this month will, or should, have an impact on all small businesses in the UK.

Those who formed part of Carillion’s supply chain must quickly risk assess the damage and rapidly respond to their suddenly altered landscape. However, all other small businesses must react to this large-scale demonstration of how far and fast a business can fall, if they elect not to recognise and then respond to integral financial problems, and pledge to seek help as soon as problems occur within their own companies.

Whilst owner managers nationwide reassure themselves they would have acted faster and more effectively than Carillion, the truth is that the early signs of trouble facing small businesses are less dramatic. Incremental. A recurring low-level alarm that finances are not as they should be. Yet for a long time they can be ignored and glossed over, though almost always to the detriment of the small business.  Licensed Insolvency Practitioners can help businesses recognise these signals, seek help at an early stage stage, and move from potential crisis on to recovery, rather than face the otherwise inevitable decline towards insolvency.

One of the greatest barriers to seeking such help is the need to admit there is a problem. An issue not to be belittled, and a mind-set not traditionally associated with the British stiff upper lip.  The belief… the hope that everything will be alright. This was borne out in research undertaken by ICAEW highlighting the top three reasons Insolvency Practitioners felt owner managers did not seek early stage help - worry about loss of control in the final outcome (57%), lack of knowledge of options (52%), and fear of the impact on family and lifestyle (41%).  The findings of this research inspired the creation of an ICAEW restructuring and insolvency guide, explaining the process, advising how, when and where help should be sought, and reassuring owner managers that finding help is the right way ahead.

Comments Bob Pinder, ICAEW’s insolvency director, “It is a terrifying thing to admit that the business you have worked so hard to build up may in fact be falling down, particularly if you have a duty of care to employees. It is critical that the message gets through to those in such a situation that with the right help, the early advice of experts and probable restructuring it is possible to turn their business around, continue to trade, and salvage the business they are so committed to. To deny the problems is to commit the business to a spiral of problems that risk ultimately devaluing even the company’s assets, as was the case with Carillion, to a point where liquidation becomes the only available outcome.”

Warning signs and responses

It is not about waiting until, like Carillion, a business is close to major debts including massive pension deficits. A business must call into question why they are unable to pay any bills, such as HMRC payments or supplier costs. Is it an ad hoc occasion that is clearly associated to an isolated situation that will quickly pass, or are the issues more systemic? In understanding this key question, it becomes possible to identify the scale and scope of help that is required.

Where one off situations have caused a cash flow crisis, such as a supplier or customer facing liquidation it is necessary to quickly risk assess the immediate and longer-term implications for the business. If there is a temporary inability to pay bills this could affect the company’s longer-term credit rating, which in turn could make raising future capital or winning future tenders difficult – for that reason it is much better to discuss options with the bank or investors to establish a short-term solution to the immediate cash flow problems.

In the case of those impacted by Carillion’s demise there are already sources of support available to them. HMRC will provide practical advice through its Business Payment Support Service (BPSS), and for some employees and their families HMRC will provide cash support through the tax credit system. Many lenders to supply chain companies affected are also putting emergency measures in place such as overdraft extensions. Critically the earlier a business talks to creditors the more options will lie open to them. If necessary, an Insolvency Practitioner will be able to take on the role of negotiator, and ensure that the optimum outcome is achieved, potentially requiring a commitment on the part of the troubled business to restructure in order to ensure future trading is sustainable. 

The insolvency process

If an immediate solution cannot be found to remedy the situation, then what form the subsequent insolvency process takes largely depends on the stage at which help is sought.

PKF Cooper Parry’s Tyrone Courtman explains further, “The optimum solution is often that the business owners are able to retain control over their company. There are a number of options available but not all enable that common aspiration to be achieved. Options such as an accelerated merger and acquisition process, or going into trading administration, disposing of assets and the business as a going concern may provide an acceptable result for creditors but in these cases it will mark the end of the business for the owners.  One of the more flexible arrangements is a Company Voluntary Arrangement (CVA). These arrangements enable owners to retain day to day control whilst returning a more beneficial return to creditors, albeit over time. To secure this there are a number of key ingredients that must be in place:

  • The proposed arrangement must demonstrate that the company’s restructure under a CVA would deliver a better result for creditors
  • They must achieve the buy-in of investors and the owner/manager(s) to be entirely open to administering the necessary changes to restore profitability
  • The support of 75% by value of the company’s unsecured creditors must be secured, in many cases the most influential of which is HMRC

The licensed Insolvency Practitioner can then become the conduit with HMRC in the formal role of supervisor, acting as a go-between with the company and its creditors. Critically though, this option is really only open to businesses that face up to their problems early – if left too late then it is most likely that an administration or liquidation will be the only remaining options available to them.

Bob Pinder concludes, “Our messages to businesses and their advisers is clear. When cash-flow becomes an issue, owner managers must seek help early. Review what state the business is in, establish where the problem lies – in the supply chain, over staffing, carrying too much stock or simply not staying on top of the accounting – and then address the cause of the problem, not simply treat the symptoms. The support and advice of licensed Insolvency Practitioners can be invaluable in guiding a business through such a difficult period.  Learn from the brutal lesson demonstrated by Carillion and secure the help needed to climb out of the insolvency curve and back into recovery.”