In November, Land Securities and British Land, high street landlords to Blacks Leisure, backed the struggling retailer’s rescue plan by voting to accept a CVA. This corporate restructuring tool is not widely used, yet more than 97% of Blacks’ creditors agreed to the proposal, a move that prevented the leisure retail group from going into administration and saved thousands of jobs.

Industry experts say the arrangement will accelerate the group’s turnaround strategy, allowing it to close down 101 loss-making stores in order to focus on its core business.

In cases where a CVA is utilised, which requires approval by at least 75% of creditors, businesses burdened with debt can continue to trade and pay creditors a proportion of what is owed to them out of future profits. Typically, a business will pay a fixed monthly sum into the arrangement for a period of three to five years, monies that are subsequently distributed to creditors. This can be an attractive proposition for creditors if the alternative is liquidation, where they stand to receive virtually no recovery on their debts.

In certain circumstances whilst the proposal is being formulated, a moratorium can be put in place that prevents creditors from bringing proceedings against the insolvent company. A licensed insolvency practitioner will assist with the proposal and, once approved by creditors, will oversee its implementation.

CVAs have not been widely used since their introduction in 1986, and historically have had a high failure rate.  But last year a number of successful high profile cases, such as retailers JJB Sports and Discover Leisure have demonstrated that they offer a genuine alternative to the administration process.

CVAs offer a number of advantages over other formal processes: 

• They are flexible and can be tailored to the specific circumstances of the company
• They enable owner-managers to retain control of their businesses
• The business is able to emerge from the process intact
• They are transparent and inclusive
• Creditors can approve or reject the proposals, or put forward amendments.

The Government is currently considering legislative changes to the procedure to further encourage corporate rescue. These proposals include the expansion of the moratorium process and giving super-priority to lenders to promote the availability of rescue finance to companies in CVAs. 

In light of these changes, it is likely that CVAs will become more popular with troubled businesses of all types in the year ahead.

For more guidance on debt restructuring, contact Andrew Duncan at Bridge Business Recovery, an owner-managed firm specialising in business reviews, corporate restructuring, funding and insolvency, on 0207 025 6130.

Every business faces risks that could threaten its very survival. Risk doesn’t discriminate. It doesn’t matter what sector you operate in or what size your organisation is, whether you are doing well or not so well.

The only way to manage risk effectively is, to first of all, understand the risks your business faces and how you are able to mitigate them.  External risks can be financial, such as exchange rate fluctuations, or strategic, such as the loss of a major customer. Internal risks can be operational in the form of accounting controls or employee fraud.

Effective risk management means identifying the worst case scenarios, asking the ‘what if’ questions, and having a clear strategy to deal with these potential eventualities.  These could include:

• If the majority of the business’s turnover is sourced from one customer, then it’s time to consider expanding your customer base.
• If one employee alone is key to a particular function of the business, it’s time to invest in training and/or recruitment.

Having identified the risks and put a plan in place to take appropriate action, next consider minimising costs.  Monitoring of overheads should always be a priority during the good times and the bad. The key areas to consider are not only maximising returns on outgoings, but also reducing these through the potential outsourcing of overhead functions such as, marketing or human resources.

Production and selling costs should also be scrutinised, reducing stock levels, and simplifying supply chains can yield substantial savings.

However, targeted additional spending, for example in IT, if well planned, almost invariably increases efficiency.

Cash really is King in a recession.  Businesses managing cash and working capital effectively have the opportunity to make strategic acquisitions, or build turnover by supplying to the customers of failed competitors.  Even small businesses should prepare cash flow forecasts, to help them prepare for ‘pinch-points’, so a potential problem does not become a disaster. Have a clear credit control procedure and consider insurance against bad debts. And consider alternative sources of funding – in the wake of the banking crisis, this has become increasingly popular, particularly with traditional lenders retrenching for the moment. Products like factoring or invoice discounting, asset and inventory finance can help ease cash flow worries and are increasing in popularity.

Finally, don’t be afraid to ask advice. The fact that 5,483 businesses went into insolvency in the first quarter of 2009 (up 57% on the same period last year), shows not enough people are seeking professional advice at an early enough stage. Make sure you are not one of them come the next quarter.

Managing risk is about identifying what could go wrong, and developing strategies to deal with potential problems. It sounds simple, but in these troubled economic times, an effective risk management policy is vital, and could potentially be the difference between success and failure.

Andrew Duncan, partner with Bridge Business Recovery

Economists and politicians may talk positively about ‘green shoots of recovery’ but the latest analysis from PricewaterhouseCoopers (PwC) shows the downturn is showing ‘no signs of abating’ with 5,483 firms becoming insolvent in the first quarter of 2009, up 57% on the same period last year.

Businesses going into some form of insolvency are very much a reality of today’s Britain. And while Insolvency Practitioners are duty bound to realise the assets of a company and distribute them in accordance with the law, this still leaves unsecured creditors at the back of the queue, often receiving little or no recovery on their debts.

However, rather than sit waiting around for a meagre dividend from a liquidation process, there are positive steps you can advise your customers to take to protect themselves against bad debts.

Much will depend on the nature of the terms and conditions of trade: make sure these incorporate a robust retention of title clause and remember that they will always be easier to enforce if there is an explicit acknowledgement of them by the debtor. Any new customer should be required to sign and date a copy of the terms and conditions, before agreeing to do business with them and commence supplying goods or services. While a new customer can equal more profits for a firm, it can also spell disaster if they turn out to be a poor credit risk.

Companies should also consider what credit limit is realistic, and stick to it.  If they are dealing with a new or unknown customer, they should always get a report from a credit agency. Another approach is to request a deposit or even stage payments.  If there’s doubt about payment, they should consider obtaining a guarantee from a parent company, if applicable.

Other techniques include a requirement that contract funds be protected by use of a trust account. Additionally, it may be possible to negotiate step in rights, particularly if they’re a stakeholder in on a project involving sub-contractors.

A robust credit control function is also essential; all debts must be collected on time, any issues should be dealt with immediately and if payment is not forthcoming, tell clients not be afraid to withdraw services. They should also monitor payment performance closely and follow up if promises are not kept.

If a customer is facing financial difficulty, and your client has already obtained a judgement against a debtor they may be able to seize goods in lieu of the debt due, prior to a formal insolvency.

And if they are supplying a service or goods to a business which goes into an insolvency process, the Insolvency Practitioner may need to enhance the realisations into the estate and it may be possible to contract directly with them to continue services or complete a specific task and so reduce potential losses.

Of course, the most obvious solution is simply not to allow any business to become so exposed to a single trading partner that their failure could threaten the future security of your client’s enterprise.  Sadly, with insolvencies at record levels, this problem is becoming far harder to avoid than ever before.

Submitted by Andrew Duncan - Partner, Bridge Recovery

andrew.duncan@bridgebr.co.uk

The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People

Andrew Duncan of Bridge Business Recovery LLP reports that with statistics suggesting the number of companies going into liquidation is up 56% in the first quarter of 2009, insolvency is an issue that hangs heavily over many businesses in today’s gloomy economic environment. But ignoring it’s potential presence won’t make it any less real and, according to Andrew Duncan, Partner at Bridge Business Recovery LLP, we ignore the “I” word at our peril. 

Here, he lists the early warning signs that may indicate the onset of problems that, if left unaddressed, could lead to insolvency.

Financial Clues:

·         Bank overdraft consistently at or above its limit

·         Bank requesting additional security or personal guarantees – or reducing the overdraft facility

·         The business using Crown funds for working capital through non-payment of PAYE or VAT

·         Creditor and/or debtor days are increasing

·         Creditors supplying goods and services on a pro forma basis

·         Creditors sending warning letters or beginning legal action

·         Number of customers declining

·         Late filing of accounts or annual return

Management Clues:

·         Management is:

o        Constantly fire fighting

o        Not producing or interpreting management accounting information

o        Lacking a current year budget, accounting and internal controls

o        Avoiding tackling core issues

o        Lacking a strategic plan

o        Taking disproportionate levels of remuneration

o        Constantly arguing

·         There’s a high turnover of staff and the team is demoralised

Detecting problems using a check list such as this can be relatively straight forward; but appreciating the underlying causes can be more complex.  Of course, just because a business demonstrates one – or even several – of these symptoms, it doesn’t necessarily mean that insolvency is the diagnosis.  Businesses don’t generally become insolvent overnight and the early detection of the symptoms of failure could make the difference between resolving short term issues and having to deal with fundamental problems that may result in insolvency.  A frank assessment of the problems is essential in deciding whether or not the business is viable in the long term.

That’s why it’s also important to work with skilled experts like the team at Bridge Business Recovery when deciding what action to take. We specialise in finding ways to help shareholders, lenders and management preserve their stakes in a troubled business and, wherever possible, put it back on a viable footing.  This might mean taking advantage of our established relationships with a wide range of funding partners or our integrated restructuring support.  If, however, the problems are deeper rooted and a formal insolvency process is the answer, our team is here to guide you through the process.

The message is clear:  in today’s environment, it’s dangerous to ignore the possibility of insolvency.  It’s a fact of life in the current market and professionals should not be afraid to address the issue with their clients.  The earlier a problem is identified, the more options there will be available to preserve the value of a business and its reassuring to know that expert help is on hand.

For more information about how Bridge Business Recovery can help, contact Andrew Duncan on 0207 025 6130. www.bridgebr.co.uk