Which button to press: liquidation or turnaround?
The overarching goal of every business adviser is to achieve a full recovery for their client’s business and secure for them a sustainable and profitable future. While navigating the tricky precipice that is ongoing solvency, how does the adviser know whether to ‘press the button’ on liquidation or turnaround and what measures can be taken before arriving at the correct decision? ICAEW member and insolvency practitioner Hasan Mirza of A G Associates shares his thoughts.
It’s very difficult to know when to opt for a turnaround, liquidation or company voluntary agreement (CVA). In essence, the decision-making process rests on two critical factors: creditors and cash, and the earlier the decision is made to call in an expert, the better the chance of saving the core business.Harnessing the support of creditors
Securing the support of existing creditors is critical to any turnaround procedure. Part of that centres on whether the creditors are owed large balances and want your client to survive due to your client being a significant part of their business. In most turnarounds, the smaller creditors tend to be more aggressive and it is easier to pay them off, as where there is less at stake the propensity to issue county court proceedings or winding up orders may be greater and companies need to be mindful of this.
Galvanising support will rely upon existing credibility. Has the client been good to their word and always paid in 30 to 45 days and kept to their credit terms? A client has to be able to liaise with creditors and have an honest conversation based upon past history of honouring payment terms in order to obtain credit again for any new debt incurred whilst an arrangement is put into place for the old debt.
Social media slandering
We all read bad reviews and think twice about buying a product. There are now social media forums where a disgruntled creditor can ‘name and shame’ their defaulters on a public platform.
25 years ago, a client going through a turnaround or liquidation experience, would liaise with suppliers on a one to one basis, leaving them to decide whether to engage again or not. Now, there are social media forums that your client may not even be a member of, but will be the subject of negative comments, due to a creditor losing monies or facing delayed payments.
The issue in terms of turnaround is what do you do with social media? You can either take a litigious approach and write a threatening letter to the creditor or, you could ask supportive members within that social media group to paint a more positive picture of your business relationships. The position is even more complicated if you are not a member of that social media group and any comments are heard through other parties. Either way any turnaround now needs to incorporate a social media campaign.
Cash
The second key ingredient is cash. It’s very difficult to turnaround a business without some ‘new’ cash. Arguably any cash injection should not be put towards clearing the outstanding payables, but to providing suppliers with a reason to continue supplying goods or services.
Any element of new cash does not have to be generated at the same level as when the business was first started as many suppliers may be willing to provide credit. The question is how to raise new cash when the business is already experiencing financial difficulty, which has been a key blocker in obtaining government backed CBILs loans.
The limited main options are raising funds from personal sources or holding on to the existing cash in the business for a longer period, by deferring payments that are not immediately detrimental to the day to day business operations and by making new proposals to external stakeholders such as landlords for rent free periods or security deposit waivers. Amenability will vary from landlord to landlord.
There may also be a scope to cut existing borrowing rates depending on the nature of the finance provider.
Informal arrangements
Without going down the route of an official CVA, a company can come to an informal arrangement with its creditors if these are small in number (under four or five). The difficulty with having a larger number of creditors, say 20 or 30, is that it just takes one creditor to issue proceedings and the arrangement is untenable.
When you have four or five creditors, you are in a position to talk to them and come up with an arrangement for them to accept.
The difficulty companies find agreeing an informal arrangement is where credit insurance is in place. A supplier is likely to take the view that they are better off obtaining 80% of their balance by the debtor going into liquidation, rather than agreeing an informal arrangement where you expect to recover, say, 50%.
The insurance industry is therefore unhelpful in supporting informal procedures as these tend to be a private arrangement between the creditors and the company.
Informal arrangements do affect credit rating as clients are paying outside the original terms, but as there is no liquidation, the directors are not exposed to a Liquidator’s investigations which also reduces any potential problem the director may have subsequently in terms of obtaining finance or credit terms in the future.
The company has to be up to date with HMRC as HMRC will not accept informal arrangements.
CVA and pre-packs
A CVA is a Company Voluntary Arrangement whereas ‘pre-pack’ refers to Administration Orders.
If a company is referred to an insolvency practitioner and is unsure which part of the business to save or turnaround then, assuming that there are sufficient funds, an administrator can be appointed to assess the business and maximise the return to creditors by either selling in whole or part and determining whether a CVA or a liquidation is the best exit option.
A pre-pack allows parts of the business to be sold to the existing directors or third parties, subject to certain best practice procedures having been followed, prior to the formal appointment of the administrator. The administrator will then review whether fair value was obtained for the assets sold during the pre-pack process and conduct an investigation into the activities of the company.
Consultation with key creditors is of vital importance when appraising any pre-pack procedure.
Overall turnaround key indicators
- Is the core business worth saving?
- Is the management team up to the task?
- Will the key customers remain loyal?
- Have only a few creditors issued proceedings?
- Is there good communication with the key stakeholders?
In terms of whether to choose a turnaround or a formal insolvency procedure, the more supportive the creditors and the higher the levels of new cash available, the greater the chance of achieving a a successful turnaround.
You can find an insolvency practitioner licenced by ICAEW by searching on the Find a Chartered Accountant directory and filtering by ‘Insolvency’. ICAEW also has its own society of turnaround practitioners.