As the retail sector faces the perfect storm, what are the options available to those businesses struggling in the current climate?
Retail currently finds itself in a perfect storm of high interest rates, increasing utility bills, supply chain issues, and a consumer base with falling levels of disposable income – all set against a backdrop of a global pandemic that continues to significantly impact the sector.
There have been a number of high profile casualties this year; MADE.com, Eve Sleep, Sofa Workshop, T.M Lewin and Joules have each suffered an insolvency event. Worryingly, the Office for National Statistics (ONS) reported that insolvencies for the second quarter of 2022 were higher than the average during the pre-coronavirus pandemic, and the squeeze on retailers is likely to continue for the foreseeable future.
While the narrative around these brands is often negative, garnering headlines such as ‘the middle classes are being told to buy less – now their favourite brands are dying’, behind the scenes every course of action is being taken to try and secure the future of the business, where possible, including company voluntary arrangements, restructuring plans and administration. So, how does each work, and how are they supporting brands in the current climate?
Company voluntary arrangement (CVA)
A CVA is a procedure that may help a struggling business under financial pressure from its creditors. It is effectively a compromise agreement or arrangement which is made between the business and its creditors. A CVA is a statutory tool, derived from Part 1 of the Insolvency Act 1986 (the Act). Once implemented, the arrangement is supervised by a licenced insolvency practitioner.
The purpose of a CVA is for unsecured creditors to compromise part of their claim for payment with a view to the struggling business returning to profitability, which will avoid the business going into insolvent liquidation (and is better than the creditors receiving no payment). The effect of the CVA is that all creditors (both known and unknown) of the business are bound by the terms of the arrangement and will then each receive a dividend payment out of the CVA.
A director of the company may propose a CVA to the company’s shareholders and creditors. For the CVA proposal to be successful, it will need the approval of at least 75% (by value) of the unsecured creditors.
If the company is already in an insolvency process, such as administration or liquidation, then either the administrator or liquidator may propose a CVA to the company’s shareholders and creditors.
Restructuring plans
Restructuring plans are another statutory process designed to help struggling businesses, having been introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) as a means of addressing the financial impact of COVID-19 on businesses.
A restructuring plan is a similar arrangement to a CVA in that is requires creditors to vote on its approval. It will also need the approval of the court before it is implemented. In a restructuring plan, creditors will be divided into separate classes depending on what rights they have against the company. Crucially, a restructuring plan does not need to be approved by a number majority in order to be implemented, and can be binding on all creditors (notably, even dissenting creditors) if only one class of creditors vote in favour.
A business will be eligible for a restructuring plan if it is a company liable to be wound up under the Insolvency Act 1986 and is judged to be “likely to encounter financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”.
Since its introduction, there has been a slow uptake in businesses choosing to opt for restructuring plans over other processes like CVAs. This is partly due to the large amount of financial and legal due diligence involved which is costly, as well as the requirement for at least two court hearings. Notwithstanding this, restructuring plans appear to be a useful tool for insolvency practitioners and advisors to larger businesses.
Administration
The most popular insolvency process, and the process often reported on by the media, is administration. Administration is a statutory procedure whereby a struggling business is allowed a period of time to reorganise and realise assets with the benefit of a statutory ‘moratorium’, which prevents creditors from taking steps to enforce claims against the business.
There are two primary ways a business can enter administration. There is the “court route” where an application is made to court and an order is made in an open hearing, or there is the “out of court route” where either the company, its directors, or a creditor with a qualifying floating charge can file a notice of appointment of administrators.
When a business enters administration, a licensed insolvency practitioner is appointed as the company’s administrator and effectively takes control of the business and its assets (away from the directors).
An administrator must seek to achieve one of the “statutory objectives of administration” which are either to rescue the business as a going concern (this is the primary objective), achieve a better result for the creditors as a whole than would be likely in a winding up (this is the second objective), or make a realisation of some or all of the company’s assets and property to make a distribution to one or more of the secured or preferential creditors (this is the third objective).
A common reason for businesses entering administration is to affect what is known as a “pre-pack sale”. A pre-pack sale is a transaction (usually a sale of the assets) that has been negotiated before the business enters administration, and the transaction will aim to complete on or very shortly after the administrator is appointed. Pre-pack sales are often the best way an administrator will achieve value for the business and assets for creditors.
Key takeaways
There’s little doubt that the events of the last few years have created additional hurdles for the retail sector to overcome and, as the Organisation for Economic Co-operation and Development (OECD) predicts that the UK faces the worst downturn of any advanced economy, those challenges are set to continue for some time to come.
So what are the top five things to consider, if a business is struggling in the current climate?
- Be proactive and seek specialist advise from an insolvency professional at the earliest opportunity. If you can act fast, you are more likely to get creditors to support any proposals and afford you breathing space.
- Recognise that “insolvency” does not necessarily mean the “end” for the business. The insolvency procedures above are designed to rescue and turnaround struggling businesses.
- Processes like pre-pack sales in administration may be an opportunity for businesses to transition into the “online only” retail market, which will significantly reduce overheads.
- Processes such as a CVA or a restructuring plan allow business owners to stay in control, and CVAs in particular are far less public than other insolvency processes.
- For larger businesses, restructuring plans provide a way to streamline and combine different restructuring processes into a single proposal, which may be essential to those businesses with complex cross-border offerings across a range of sectors.
While consumers are being encouraged to spend less, there’s no reason why the headlines should mark the end for struggling brands when alternative avenues quite clearly exist.
If you’d like to discuss any of these issues or have questions about the article, please contact Daniel Clarke or Aaron Joahnson in the Insolvency and Restructuring team.
Daniel Clarke
Associate Partner, Insolvency and Restructuring
T: +44 (0) 161 393 9047 M: +44 (0) 7920 237687
Dan specialises in both contentious and non-contentious restructuring matter from the perspective of insolvency practitioners, lenders, creditors and directors/businesses. Dan has represented clients in two cases before the Court of Appeal on matters of significance for the law in respect of sections 375 and 286 of the Insolvency Act 1986 respectively. His personal highlight is rescuing a local, non-league football club from liquidation in time for it to play in the first round of the FA Cup.
Aaron Johnson
Solicitor, Insolvency and Restructuring
T: +44 (0) 161 393 9092 M: +44 (0) 7719 067609
Aaron has joined the team at Pannone Corporate in 2022 having qualified as a solicitor in September 2021 at a well-established law firm in Leeds. Aaron is experienced in dealing with both contentious and non-contentious personal and corporate insolvency matters.
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