Crisis management: take evasive action

business turnaround cover

Whatever the reason and however bad it looks, there is always hope for a
struggling business. But if you ask insolvency professionals, they’ll tell you
that the earlier you recognise problems, the more options your business will

‘You give yourself more room to manoeuvre if you act before the company is
issued with a winding-up order,’ says Carolyn Swain, insolvency partner at law
firm Halliwells.

‘Management teams are still not facing up to the severity of the situation,’
says Richard Boys-Stones, partner in corporate restructuring at

So what are the options for you and your creditors? Administrations and
Company Voluntary Arrangements (CVA) are designed to give creditors the maximum
return on what is owed to them while trying to keep companies alive and minimise
job cuts.

So, in the 21st century, who is keeping these distressed companies alive? The
insolvency landscape has changed enormously during the past five years, with
greater numbers prepared to invest in struggling businesses.

Liquidity boom

The long and short of it is the liquidity boom has created funds hungry to
invest in anything registered at Companies House, if they see the potential for
a return.

Hedge funds looking for high-risk and quick returns are more than happy to
invest in distressed businesses.

They will often work closely with insolvency practitioners to advise them on
potential purchases and spot value.

This is good news for those entering insolvency, as there could be enthusiasm
for their company.

Purchases may be made with equity, but deals are often leveraged. This means
even more debt may be linked to a business that is struggling to survive –
not-so good news.

Asset-based lenders are also sniffing around troubled companies. ABLs look at
the asset base of the business, its debt and stock levels – then invest. They
don’t focus so much on cashflow.

‘They look at the underlying assets. If it all goes wrong, they can rely on
those physical assets,’ says Boys-Stones.

Economists have predicted the end of this liquidity boom, but others are not
so sure this is impending.

‘If there is a downturn, the level of money available suggests it may not be
until next year,’ says Boys-Stones.

Complicated structures

But liquidity will not stop the inevitable in some cases, and ownership
structures are becoming more complicated because of the number of lenders linked
to any one company. Insolvency experts predict a future when selling an
insolvent business will take a lot of time and energy in managing the interests
of all these parties.

‘We’re heading into the unknown,’ says Boys-Stones.

Even if liquidity does dry up, lenders will have to stay on to get a return,
and will be unlikely to want to force companies to the end – liquidation.

‘Liquidation is very much the end of the road,’ says Swain.

‘But it could be said that non-traditional insolvency is on its way out,
refinancing and sorting out your organisation through a fund, or turnaround
specialist, is the way forward.’

Company Voluntary Arrangement

What happens?

If a ‘business angel’ can’t be found to buy your business, then
administrators could rustle up a company voluntary arrangement (CVA).

  • A CVA must be agreed by more than 75% of creditors by value, but, if agreed,
    a medium-term package is put together where the business continues to trade
    while paying off a proportion of its debts.
  • CVAs can be offered by the directors of the company – with the help of an
    insolvency practitioner – or through creditors that have put a company into
  • The CVA restructures the company’s debt and keeps it alive.
  • A good recent example is that of Leeds United, where the football club
    entered administration, and administrators from KPMG agreed a deal to sell the
    business back to chairman Ken Bates – which required the agreement of creditors
    in a CVA. Despite the controversial nature of the deal, where creditors would
    only receive a penny in the pound, the proposal scraped through with 75.2% of
    creditors ‘onside’ of the administrators’ deal.

What are the results?

While Bates remained at Leeds, in both CVAs and administrations, the
management can often be unceremoniously booted out. Administrators can take the
view that the management team is not up to the job and ask them to leave. For
owner-managed businesses, or where directors are substantial shareholders, the
insolvency experts will probably have to stick with them.

Suppliers, retailers and manufacturers often have a more sanguine approach to
being owed money. They might see that a dead business loses them a customer.
Sometimes cutting losses and accepting a few pence in the pound is a better
decision in the long term. But masses of employees could be made redundant, and
there is the prospect of pension liabilities.

‘When I worked with QS-Bewise, we structured a CVA, and the suppliers
recognised under the terms they were taking a cut [of what they were owed], they
recognised it was a solution for a more stable customer in the future. Suppliers
are fairly pragmatic,’ says Mark Byers, Grant Thornton’s recovery and
reorganisation services developer. The agreed CVA saved 3,000 jobs at the


What happens?

In times of severe financial difficulties, it is likely that a major
creditor, such as the taxman, a lender or a supplier, will petition the courts
to place a company into administration in a bid to recoup what is owed to them.

Directors also have the option to keep the business alive through petitioning
the courts to put their own company into administration.

Directors would do this to put the most ardent of creditors on hold while
insolvency practitioners, known as administrators, attempt to save the bus
iness. The management could even buy back the company, free of many of its
debts, if they provide the best deal going forward.

‘Creditors can’t really be put in a worse position than before administration
– it gives you a moratorium,’ says Swain.

When creditors put companies into administration they appoint the
administrators. But that is not necessarily bad news for the insolvent business.
Under current legislation, insolvency practitioners must attempt to balance the
desire of creditors to recover their funds with an effort to help the business

What are the results?

Every business operates differently within its own market, and this maps
across into insolvency. Every company is different, but businesses in the same
sectors tend to follow the same method and processes of entering into insolvency
and, for the lucky ones, the rescue package is often similar.

People businesses, where the assets are human, face particular problems if
they approach insolvency.

An insolvent professional services business, for example, would lose staff
immediately to competitors. The business then has no value and could be

‘With people businesses you could be in freefall as competitors tap up staff
and clients,’ says Grant Thornton’s Byers.

Pre-packs 1: If disaster looms, insolvency practitioners
should be called in to help the company prepare to come through the insolvency
process, by organising a sale of the business prior to entering administration.
This is known as a pre-pack’ ‘You have to act quickly,’ adds Byers.

Pre-packs 2: The sale of the business is pre-packaged by the
soon-to-be administrators. The business enters administration and is then sold
immediately to the new owners.

Pre-packs 3: The technique is extremely controversial, as
creditors see pre-packs as a deal done without administrators properly marketing
the company and getting the best value for the business.

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