The Insolvency Service statistics for different types of insolvency procedure tell a stark story of the relentless move towards Creditors Voluntary Liquidations (CVLs) to solve business problems and away from the primary rescue procedure, Administration.
So far in 2023, 83% of corporate insolvencies have been CVLs and only 6% have gone the Administration route. Before the pandemic in 2019, these percentages were 67% and 10%, respectively. Look back further to the global financial crisis in 2009 they were 57% and 16%.
Why so many CVLs?
The narrative in the media is all about shattered, battle-weary entrepreneurs throwing in the towel after being worn down, initially by the pandemic and then by the ripple effect on costs and supply chains caused by the Ukraine war. Now we have an interest cost crisis.
It has certainly been an extended period of unprecedented disruption, but whether it justifies what looks like the abandonment of the rescue culture is another matter. Some commentators have talked of the problems of saving businesses when asset values are so uncertain and the prospects for some sectors so unfathomable. Others have noted the caution among lenders and business funders, which characterises the risk adverse phase common after most recessions.
Why so few Administrations?
Were there really only 612 businesses in England & Wales in the first five months of 2023 worth trying to save through an Administration, but 8,460 beyond help and needing to be buried through a CVL? Are there so few potential buyers of troubled businesses and such limited rescue funding available?
Is limited professional capacity an issue?
There were 23,397 corporate insolvencies across the UK in 2022, making it the second worst year since 26,566 in 2009 at the height of the global financial crisis. Extrapolating from the first five months, this year could see almost 26,000 failures, while the trade insurer Allianz is predicting 28,500 this year and even more (31,000) next year.
There have long been fears about the capacity of the private sector insolvency profession and the Insolvency Service working through its Official Receiver structure to cope with high numbers of formal insolvencies, especially where the bulk of these are small companies with little by way of assets. Could recommending the relatively formulaic CVL option, rather than the much more complex and work-intensive alternative of an Administration be a reflection of these issues? Are advisers considering non-insolvency, work out solutions?
Why it’s always worth considering all the options
A few years ago, we were approached by the accountants to a 25-year established £6m turnover logistics business, which had been struggling for some time with mounting creditor pressure. An independent review commissioned by its bankers saw no viable future and subsequent discussions with two insolvency firms produced the same recommendation: Administration. The potential losses for stakeholders would be considerable. The sale of the company’s freehold generated cash to ease immediate concerns and facilitated a move to a new lenders, but nothing was done to address underlying commercial issues and cash flow problems re-emerged.
Despite the ongoing problems, the accountants were more positive, believing that the business ought to be attractive as a ‘bolt-on’ going concern acquisition for one of its competitors. Our review supported this view. The Directors instructed Opus to carry out a consensual sale exercise outside any formal insolvency procedure. A teaser document was distributed and generated interest from 10 potential purchasers. Within two months, a share sale to a larger logistics company with the necessary funding and commercial clout to support the increased working capital requirement had been concluded.
The outcome could hardly have been more positive:
- The business was saved and all jobs were preserved
- All creditors were paid in full
- The owners received a significant payment for their shares
- The owners were released from their personal guarantees to the funders
- The owners were retained on a short-term consultancy basis
- The incumbent lender continued to provide facilities
The moral of this story
Not every business can be rescued, nor can a formal insolvency process be avoided in every instance. Never the less, before pressing the CVL button, other possibilities should always be explored. Is there a trade buyer out there looking to grow by acquisition? Does the business need to go through an insolvency process to crystalise and eliminate some adverse factors like an onerous lease or predatory customer or supplier relationships which are deterring potential purchasers? In that case Administration will still be necessary. In either scenario, the end result will be better than even the most elegant CVL burial.
How we can help
We have extensive experience advising business owners and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.