2018 was a tough year for the retail sector and 2019 does not appear to be any easier. Online competition, resulting in reduced footfall, high rent, rates and increasing staffing costs are only a few of the issues which businesses are facing.
When financial pressures mount, business owners need to be taking professional advice to explore all the options available. We have seen many companies opt for a Company Voluntary Arrangement (‘CVA’) over the past year, most notably House of Fraser, Toys R Us and Homebase. CVAs were favoured in these cases in an effort to restructure its business and to offer creditors a formal repayment proposal, whereby allowing the directors to retain control throughout. Unfortunately, as we saw with the likes of House of Fraser and Toys R Us, the CVAs failed soon into the Arrangements which resulted in both companies being placed into Administration.
Where a CVA may not be achievable, companies may opt straight for Administration. We saw this last year with Poundworld, HMV (for the second time!) and already this year, Treds and Patisserie Valerie. Administration will provide some protection to a company by way of a moratorium and is typically used when there is an underlying business, or part of a business which can be sold. Once an Administrator is appointed, directors lose control of the company and it is the Administrator who may choose to trade the business for a short period to further explore interested parties. Similarly, Administrations can also be used to sell a business immediately after the company has entered into Administration, known as a ‘Pre-pack’.
When companies come to the end of the road, the remaining option available is Liquidation. We saw Carillion enter into Compulsory Liquidation last year which is a Liquidation through the court, although it is much more common for businesses to enter Creditors Voluntary Liquidation which avoids a court process and is instigated by the directors and shareholders, using a Licensed Insolvency Practitioner. The process formally winds down the company. Assets will be sold, often at auction, and where sufficient funds have been realised, these are then distributed to creditors.
With continuing profit warnings from many household names and the general uncertainty over the future of the high street, business owners need to ensure steps are taken to mitigate risk. Robust business plans need to be in place coupled with well managed cash-flow forecasts. By doing so, business owners should be able to see any obstacles at a much earlier time.
Jon Mitchell is a Licensed Insolvency Practitioner with over 15 years of experience dealing with businesses within multiple sectors.
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