Act fast when trouble hits
The Government issued formal insolvency statistics recently for Quarter 2, 2016. Interestingly, this shows corporates in Northern Ireland are not availing of formal restructuring processes which, if used properly and early enough, could prevent a number of insolvencies.
Between April 1 and June 30 2016, 101 companies in Northern Ireland were placed into insolvent liquidation. This is a process where a company cannot pay all its debts, trading ceases and a liquidator realises the value of company assets to distribute to creditors at the prevailing pence in the pound.
In contrast to liquidation, companies in financial difficulties have the option of a Company Voluntary Arrangement (CVA) or administration.
This is where the directors conclude there is an underlying viable business but a formal restructuring is needed to put the company back on a sustainable footing.
The statistics show that only two companies agreed a CVA and nine were placed in administration during the same period. The data is consistent with the trend in England and Wales, where insolvent liquidations account for almost 90% of the total.
While there is no doubt some companies, which may initiate an informal restructure, aren't included in the official statistics, what we see in the figures matches our professional judgment of what we see in the local marketplace.
When a business faces financial difficulties it is hard for all involved.
Often tough decisions are put off in hopes the company will return to profitability. If it doesn't, by the time advice is sought you really only have an insolvency option and equity value has long been diluted to £nil.
Before it's too late, we recommend you seek early advice on a restructuring plan, bearing in mind the following factors:
1. Act early, don't put off hard decisions. The earlier you act the more options may be available and the more value will be protected.
2. A key question is whether the underlying business is viable and a restructuring plan has a reasonable prospect of success. Often it is good to take advice from someone who is independent and not involved in the day to day running of the business.
3. Understand the key reasons for the current distress. By identifying the underlying issues it's easier to formulate a solution. While it's easy to think an increase in sales will save the day, is that realistic and will it result in a net cash profit? You may need to look deeper at costs, working capital, the funding structure, your business model in order to restructure and survive.
4. Keep key stakeholders informed and seek buy-in for your restructuring. Continued support from suppliers, funders, customers and employees is vital if you are to implement a viable restructuring.
5. Changing certain dynamics of your business can have tax implications. This should not be ignored.
6. Identify and assess the potential funding requirement for a restructure to succeed. This can include funding trading losses, capital expenditure, working capital investment and professional fees and understand where the funding is going to come from.
Scott Murray is a director in Keenan CF's corporate restructuring team