How can businesses overcome unsustainable liabilities?
Friday October 23, 2020
Restructuring Partner Allan Kelly explores how viable businesses can use restructuring processes to re-position themselves for new growth in 2021
Over recent months, firms across the country have faced headwinds that have hampered or halted their ability to generate revenue.
But as trade has ceased or slowed, many companies’ liabilities – from a balance sheet perspective – have continued to grow. The pressures of the pandemic will have prompted some to take on additional debt to help bolster their resilience and support losses, either from private sources or through government support schemes, or to defer payments, such as VAT or rent; all of which will still need to be repaid.
With operations still disrupted and the continuing threat of further challenges ahead, many well-run and previously healthy firms may now find themselves in the position where the revenue they generate is only just above, or sometimes even below, the amount they need to service their debts.
Company directors or owners in this position will be working hard to find a strategy to overcome this situation and return themselves to a position of strength and profitability. And for viable businesses, there are options to hand.
In certain cases, creditors might agree to take haircuts on debt by making concessions through informal negotiations – offering forbearance on outstanding rent, for example. However, this won’t always be possible.
While it might not be the first thing that comes to mind when directors think about recovery, formal restructuring procedures such as Company Voluntary Arrangements (CVAs) or pre-pack administrations could offer firms an effective way forward instead.
Company Voluntary Arrangements
CVAs are often at the top of the curve for restructuring processes as they are one of the few formal options that keeps a corporate entity alive, while helping to rehabilitate businesses and optimise the outcome for stakeholders. As a strategy, they are particularly suited to the circumstances firms currently face – situations where companies suffer sudden shocks due to external pressures that are outside of their control or need time to restructure to make the business fit for the current economic climate.
At a fundamental level, a CVA involves establishing a binding, formal agreement with a company’s creditors for repaying its outstanding liabilities – giving a business valuable breathing room in which to focus on its recovery. Often, a CVA will operate over a period of three to five years, with a business making contributions to its creditors at regular intervals.
In other instances, a CVA will involve making a lump sum payment to creditors instead – often secured from third party private lenders.
For a CVA to be put in place, it must be approved by both at least 75 per cent of a business’ voting creditors and more than 50 per cent of the creditors unconnected to the business. Once it has been approved, the CVA will bind all of a company’s unsecured creditors, but will not bind secured or preferential creditors unless they consent.
Securing the 75 per cent vote can be a challenge, but there are some steps directors can take to help secure creditors’ support. Right from the outset, it is essential to thoroughly assess the pressures facing operations, as well as determine how directors will address headwinds going forward to stop the same problems reoccurring and how they expect a business’ wider outlook to change. Clear, open and honest communication throughout the process is key – creditors must understand a business’ situation and the value that can be derived for them by agreeing to a CVA structure.
It’s important to identify and engage with all creditors who will be needed for the continued operation of the business, even if they have little or no voting capacity. And, where possible, it’s worth exploring how interests can be aligned by finding ways for creditors that are compromised by agreeing a CVA to benefit from the business’ good performance in future such as a share of future profits.
Establishing a robust, effective CVA proposal can take some time. However, it’s important that this is invested to ensure the best possible proposal for all stakeholders is placed on the table.
CVAs won’t be suitable for every situation – a business will need to have genuine future viability in order to successfully implement a CVA. However, where an otherwise successful and well-run firm has suffered under the pressures of current conditions, a CVA can help give them the motivation, and ability, to emerge in a healthier condition.
Where a CVA is not deemed an appropriate tool for a business – for example where a business is considered to have limited chances of recovering fully in its level of liabilities – consideration often turns to pre-pack administrations.
A ‘pre-pack’ involves administrators arranging the sale of some or all of an insolvent company’s assets to a new or existing company prior to their appointment over a business. The sale is then completed upon their formal appointment, while the company in question is then liquidated, with the proceeds from the sale of its assets distributed to creditors.
The structure of a pre-pack can offer benefits to a purchaser and creditors alike, depending on the situation they find themselves in. For example, marketing and selling a company’s assets prior to the appointment of administrators can maximise the value secured, in turn helping to deliver the largest possible return for creditors.
It’s worth noting at this point that the purchasing entity could include company directors, existing management or a third party, who can acquire the existing business’ assets – which must be independently valued.
As with CVAs, directors will need to carefully assess whether a pre-pack administration is the right way forward for their business especially if the business is heavily reliant on industry accreditations or specialist suppliers – the advice of a professional adviser can be invaluable in this process. And, above all, it’s important to remember that pre-packs can only proceed if it is determined that they are in the best interests of both a business and its creditors.
However, when done correctly, they can also provide directors with an effective route forward, while preserving value for creditors involved.
There is no doubt that the coming months will continue to pose challenges for firms up and down the country. However, by making the most of the specialist tools available, businesses with otherwise viable operations will be able to secure the best possible outcome for themselves and their creditors, while putting themselves in the strongest possible position for future success.
Now is the time to review, adapt and evolve. Our team of specialist advisers are on-hand to support every step of your business journey, providing integrated and tailored guidance that empowers your business to prosper in the new economy. If you are keen to assess your options, please don’t hesitate to contact us.
Formal restructuring procedures such as Company Voluntary Arrangements (CVAs) or pre-pack administrations can offer an effective way forward.Allan Kelly Restructuring Advisory