In a previous article, we highlighted how key employees are. They are also your eyes and ears when dealing with your customers; often they are the…
With enforced closures having a detrimental effect on balance sheets for businesses in the food and drink sector and despite the raft of support made available, the sector was still one of the worst affected in terms of insolvencies. Whilst there is optimism amongst the sector and significant pent-up demand, there is the very realistic concern for some that ongoing trade will be insufficient to deal, with debts built up from closures, leading to these businesses potentially taking insolvency advice.
Insolvency advice may sound like the end, but the primary objective is always to look to rescue a business, saving jobs in the process and there are several tools available to do this.
Company Voluntary Arrangements (CVAs) have become increasingly popular amongst food and drink businesses over the last 5 years. This is a very flexible agreement between a company and its creditors in full and final satisfaction of its historic debts. Typically, CVAs involve either a lump sum contribution or contributions from ongoing trading profits over a period of time. If approved, the CVA binds all creditors regardless of how they voted. Many businesses have also used CVAs to renegotiate leases to more favourable terms and exit loss making leases.
That said, CVAs have drawn increasing criticism, especially from landlords who believe they are being forced to absorb the financial losses of a business whilst other creditors continue to be paid. The result of this is many high-profile challenges to approved CVAs. This is problematic for the business proposing a CVA, as time and resources spent dealing with the challenge is time and resources not focused on turning the business around.
This is where the new Restructuring Plan may help. Restructuring Plans are similar to CVAs in that they are an agreement between the company and its creditors in full and final satisfaction of debts. However, creditors are divided into different classes for voting purposes and provided one class vote is in favour of the plan, the court can force dissenting classes to be bound by it provided the outcome for creditors is not worse than the alternative (likely administration). This Cross Class Cramdown is part of the approval process for Restructuring Plans meaning it is less likely future management time would have to be spent dealing with a legal challenge as the Court has already sanctioned the plan as the best outcome for creditors.
This is not to say that companies can use Restructuring Plans to force unfavourable terms on creditors. The outcome under the plan cannot be worse than any alternative for the Court to enforce the Cross Class Cramdown, and the fact Restructuring Plans require court hearings inevitably mean costs will be higher. However, the increased flexibility can greatly assist businesses in financial difficulty, especially those with difficult creditors.
Could you benefit from a business review?
If you’re concerned about your business and its future, the earlier you seek advice the more options there are likely to be.
We want your business to succeed and will work with you to try and achieve that, using our knowledge and experience to make sure that you get the best possible advice. Our experts have a wealth of experience in the food and drink sector and understand the issues businesses are currently facing.
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