As we enter the ‘new normal’, it is useful to highlight a couple of recent advisory matters that Moore Kingston Smith Licensed Insolvency Practitioners has been involved in. These are ongoing cases so some details have been removed to protect anonymity.
Restaurant chain with some ongoing profitability in certain trading units
We were contacted to give advice on a chain of ‘low-value’ restaurants. All branches are currently closed under the Coronavirus lockdown rules and all staff furloughed. Some of the units had ongoing profitability warnings issued before lockdown and closure was likely in any event. Having identified the most profitable units, we negotiated with the relevant site landlords to establish discounted rents during the closure and post any sale, particularly as a pre-packaged sale was being considered.
The landlords were helpful and agreed free periods going forward. This would enable a pre-pack without risk of the landlord demanding an administrator pay rent as an administration expense before any formal assignment. This was paramount to ensure that any form of rescue was achievable. The furloughed staff on the profitable units would go across to the new company and remain furloughed. The staff in the other units would be made redundant.
Negotiations with landlords can be key to any business rescue and ensuring continuing cost control through furlough was a critical area to allow a sale of a business, albeit mothballed until sometime in the future.
Company voluntary arrangements (CVA) in the Coronavirus pandemic
There has been much emphasis on the use of CVAs to help businesses deal with mounting debt while trading is severely affected by Coronavirus. While one of the critical conditions of a CVA is met (a change in circumstances post-CVA that caused many of the issues pre-CVA), meaning income generation would return to normal on the other side of the pandemic, it is unclear when this bounce back would be achieved and how quickly it would happen.
This means that it is almost impossible to provide accurate cash flow forecasts to show how contributions to historic debt could be met from post-CVA trading profits and thus cash flow surpluses. To gain creditor approval, it is key to engage from an early stage with the main creditors so that they understand the issues and the intentions of management.
We are attempting to build in flexibility to future contributions to dovetail with cash flow generation. It will also allow amendments to timing and levels of contributions to ensure some certainty on the dividend expectations.
A CVA can be used to address post-Coronavirus ‘normality’, provided the advisers can be both transparent with creditors and flexible in their approach. Even on the cost side, it may be possible to save ongoing occupation costs, as many have found that working from home can be both effective and cost-efficient.
Management should start to think outside the box, as the post-Coronavirus world will look very different to the current situation. The government is bending over backwards to offer funding, deferment of tax and other support. While these measures are often a helpful tool for recovery, they should not be used to kick the can down the road and businesses need a cash plan to pay them back.
I have seen CVAs that an insolvency practitioner has hurriedly put together because it is an easy sale to the management board (shareholders of OMBs). They retain control, maintain some potential shareholder value and avoid a formal insolvency report on their conduct. Directors need to be wary as to whether the proposals are viable and sensible in their approach. Much of that will be down to the advice, so don’t expect miracles. If the advice and answer seem too good to be true, they probably are! These are difficult times and the answer is rarely simple.