The IBSA Podcasts
IBSA podcasts contain information from a global community of entrepreneurs and professional advisors dealing with international business structuring and regulatory compliance.
Hosted by Roy Saunders, who has over 50 years’ experience within the financial sector, these podcasts delve into enlightening conversations with a wide range of leading professionals aiming to demystify the complex world of business and provide invaluable insights to help listeners deal with various complex technical matters to best support their business and clients.
Disclaimer: We believe the information in this podcast to be correct at the time of recording. The information given is relevant at the time in line with governmental legislations. Competent counsel in the jurisdiction(s) whose laws are involved should be consulted. The podcast is made available by the IBSA for educational purposes only and to provide general information. The information should not be used or relied upon as a substitute for competent legal advice from a licensed professional in your jurisdiction.
The IBSA Podcasts
Vernon Dennis Delivers Insights on Navigating Corporate Financial Challenges and Insolvency Options
Embark on a riveting exploration of financial tightropes and corporate survival tactics with our esteemed guest, Vernon Dennis of Howard Kennedy. Together, we unravel the intricate tests that signal a company's financial health—the cash flow and balance sheet tests—as we share the story of Niklas and his venture, T-App UK Ltd . Through this episode, you're guaranteed to gain invaluable insights into the crucial moments when a director must pivot their focus to creditor interests, and the decisive actions that could rescue or sink a business like the Tasch task management software.
Navigating the murky waters of potential insolvency, we discuss the lifelines available, from Company Voluntary Arrangements to administration and even liquidation. Vernon imparts wisdom on the delicate art of valuing a distressed business and the transparency required to maintain integrity throughout these complex processes. Learn the nuances of pre-pack administrations, the strategic benefits of restructuring plans, and how to handle the sale of assets with the utmost fairness to all parties involved. This episode is an essential listen for leaders and entrepreneurs seeking to understand the responsibilities and options during the most challenging times of corporate restructuring and insolvency.
This podcast explores a fictitious case study centred around an entrepreneur’s ambition to develop a task management software company. Click here to read the case study in full.
Vernon will be examining this in greater detail at our upcoming conference in May. Click here for full details of the conference and to book your ticket.
Hello and welcome to the IBSA podcast on the topic of corporate restructuring and insolvency. My name is Roy Saunders, founder and chairman of the IBSA, the International Business Structuring Association, which is a multidisciplinary global association of entrepreneurs and their professional advisors, dedicated to sharing their expertise with each other within a great networking platform. Today, I'm joined by Vernon Dennis of Howard Kennedy and I'm changing my identity to become Nicholas, the entrepreneur behind my fictitious case study, which formed the framework of our autumn workshops and which will feature in the forthcoming annual IBSA conference. I would direct our listeners to read the case study on the IBSA website under the conference page at the IBSAorg to fully understand what we will be discussing today.
Speaker 1:At this stage of the development of my brilliant TASH task management software program, I, as Nicholas, am running out of money and need to consult you, vernon, as to my options in respect for my UK company, tap Limited. In order to continue in business, I need to understand whether my business is insolvent, whether it's worth saving, how I go about this and how I can retain my rights over the TASH software that I created. Firstly, vernon, unless we get funding very soon, I cannot see how TAP Limited will be able to pay the developers. What should I do?
Speaker 2:The first thing I would do in advising you, Nicholas, or we're here is to think about what your aims and purposes are. What are the aims of the business? What do you want from the situation that you're now faced in? Because that, if you like, starting from the end, of looking at what the objectives are, will drive what options are available. But, first and foremost, one then needs to establish are we talking about a solvency or insolvency situation? When you're looking at insolvency, there's two principal tests to take into consideration. The first is a cash flow test.
Speaker 2:By your introduction, there seems to be some cash flow issue inability to pay the developers. A cash flow issue test of insolvency is one where there is an inability to meet debts as they fall due. I would ask, Nicholas, what other debts are falling due? When can they be met? What does the cash flow projections look like for the business? Because this might tell us whether there is a media cash flow difficulty or cash flow insolvency.
Speaker 2:But the other, equally important test of insolvency is a balance sheet test. The assets exceed the liabilities of the business. In doing that, the director has to have a very serious concern as to looking at future prospective contingent liabilities, Future ideas, when you sometimes get yourself in the situation is that you may be cash flow insolvent at the time but in the future, a future event may occur where you won't be able to meet that liability. You've got to take into account the prospective insolvency. Acting as a director in the shadow of insolvency raises certain duties, responsibilities, obligations. That then limits the choices that you might have right at the very beginning, when I'm outlining what do you want with the business, etc. So an assessment of the insolvency is really important.
Speaker 2:Now there's not something very often the lawyer can do.
Speaker 2:You can't test the insolvency or otherwise.
Speaker 2:Sometimes it's very obvious on a cash flow insolvency, if there's a debt that can't be met, you can say, well, you're insolvent on that basis. But a balance sheet insolvency test is a much more nuanced and difficult issue and really realize upon the director taking a very good view as to the business, what his prospective future revenues are going to be, but also what the liabilities are like and where those liabilities are going to fall due. So when I talked about the contingent respective future liabilities and in that assessment you need to work very closely with the director and it may be that you need to work closely with the accountant. If there's a very good Treasury Department within the business, you know you can work very closely with the CFA. But it may be that you need to bring in external accountants. It may even be bringing in insolvency prediction to provide real granular advice upon the business and its solvency. But, as I said, the issues that the business faces and the options that it has is driven by that first question Are you, are you not insolvent?
Speaker 1:We can't meet our debts at the moment, but I am looking for further funding and likely to get further funding, I think so. Can I continue trading in TAP while I'm looking for this further funding?
Speaker 2:Well, I think the first thing we need to consider is really your duties and obligations as a director.
Speaker 2:As I said, when you're looking at solvency or insolvency of a company, different obligations arise. Now, primarily, the issue is the promotional success of the company for the benefit of shareholders. But where the company is insolvent, the director's duties are to promote the success of the company for the benefit of its creditors a very different duty, a very different responsibility. So one has to be very careful as a director in continuing to act where the company is insolvent, because the due to overriding duties are what is in the best interest of the creditors.
Speaker 2:Now, continuing to trade may be in the best interest of the creditors, for instance, an immediate cessation of business, a stop would stop it, or revenue flow, but also there would be customers who couldn't be fulfilled etc. And that would cause loss. So that's one aspect. The other aspect is the potential future revenue or reworking capital that might be provided by a new funder. So you would look very carefully as to well, what is the probability of that funding coming through. And that's really looking at sort of balance sheet insolvency point that I may be insolvent now, but I can see that there is a prospect, a real, reasonable prospect, that insolvency may be avoided by future funding. So there is that ability to continue to trade, but you have to be very carefully doing that getting advice on duties or responsibilities, assessing that continuing to trade to see whether it is in the best interest of the creditors and overall ensuring that you avoid actions which might cause loss to the creditors.
Speaker 1:What's my personal liability there?
Speaker 2:Well, yeah, this becomes the major point that if you fail to act in the best interest of your creditors, if you cause loss to your creditors, then personal liability can ensue. So the issue for any director is to ensure that they're acting in the best interest of the creditors and to avoid an insolvency process. But if an insolvency process does arise, then the office holder, be that a liquidator or administrator, will look back at the conduct of the director and look to see whether their actions whilst they were in the shadow of insolvency has caused loss to the creditors. If that loss to the creditors has been caused as a direct consequence of the failure to put the company into administration or liquidation at an earlier date, then personal liability can ensue, and liability for the increased detriment to the creditors is the starting point for any kind of compensation. So what I often say to directors is that the wrongful trading and that's really what I'm talking about here wrongful trading is often described as the biggest market of insolvency, what directors often are principally aware of.
Speaker 2:But it does have a bite, and the bite is personal insolvency. It's a personal insolvency for the individual because it's going to have personal liability and potentially, if they can't meet that liability, personal insolvency themselves. So it has significant consequences. Insolvency also has a number of other different connotations as well. As I said, not only just acting in the best interest of the creditors, but if you cause loss by actions that you've taken, you have caused your breach of duty to your creditors. Loss can be attributable to that as well. There's sort of misfeasance and there's also personal liability that can attach if you have misdirected funds, misapplied funds, a paid, a connected party paid yourself in priority to other creditors, for instance, repaid alone, etc.
Speaker 1:Okay, so I mean, one of the things that I'm concerned about is this fantastic software that I've developed, developed the task management software. I don't want to lose that out on insolvency. So you know, I might want to buy that myself, or I'm not sure how to go about it. But what? What can I do to protect that intellectual property?
Speaker 2:Yeah, looking at options that are available for the business, the first thing that one would always assess is what sort of assets have you got, what realizable assets has this business gotten, and to see how best they could be used for the benefit of creditors and that sort of unusual kind of events. One's looking very much at a company like this as to what IP it owns. Now I understand that there's some IP which is owned by an offshore vehicle and licensed it to this particular vehicle.
Speaker 2:But this particular corporate vehicle as well seems to have carried out its own development, so may have some its own IP. Now one of the major, major problems that can arise in these kind of things is if directors take action too early and seek to protect what they see for you as their asset, their IP, perhaps moving it to a different corporate vehicle, perhaps putting it their own name. I've actually advised, I provided advice where a director did exactly that. He was protecting the IP from the machinations of other shareholders and creditors, so he put it in his own name and I can say in that situation he ended up with a 15 year disqualification, not only personal liability for doing so, but disqualification as director for taking that kind of action. Because where is a company asset? You've got to act in the best interest of the company and its creditors. So you've got to think very carefully about what assets are owned and how you protect them.
Speaker 2:But there is a solution of these things and that's really getting an assessment of what IP you have and evaluation of that IP. And if it is independently valued by two or three parties, then there is quite possibly a way of moving that IP into a different vehicle with consideration going back into the UK vehicle for that transfer. Alternatively and perhaps this is something we'll explore later if insolvent liquidation or administration of the UK company is inevitable, then it could well be the case that putting it through an insolventing process allows the purchase of the assets, including the IP, from the insolventing practitioner and for a director that's probably a much safer and more convenient way of ensuring that proper value is passed, because if you've obtained or obtained IP outside of an insolventing process, then an insolventing process arises. It's quite likely that the IP will look back very carefully and closely look at that, very closely at the transaction that has occurred, whereas if the insolventing practitioner is actually conducting the process of sale and realization of the asset, then obviously they're in control of that.
Speaker 1:Actually, I guess that the owner of the IP is going to be the sole person that might want to buy that IP. I guess.
Speaker 2:Well, again we go back to that issue of which IP or where it sits. So the principal owner of the IP, who has licensed it, you would look very carefully at that license, for instance. So is it automatically terminated on an event of insolvency? Has the licensor got the ability to terminate it for any notice? Does he have to give notice? Does he have to give reason or otherwise? So the value of the UK company is very intrinsically linked to the IP that is licensed to it and its ability therefore to continue as a business outside of Nicholas's control is going to be very dependent upon that IP license and whether it is severable or is capable of assignment or otherwise.
Speaker 2:In the normal course of events I would expect the IP license to be terminated at the behest of the licensor, ie the offshore vehicle, which means UK company can't then use the IP.
Speaker 2:But the UK company has done something about apps, it has done some development itself, so it's likely to have some IP rights. So it goes back to your principal point that the person with the primary IP license, the primary technology IP and the technology, is likely to want the use of the technology that has been developed by the UK company and be therefore the sole purchaser? It's a difficult question and it's one that the Insolvency practitioner, when appointed, would look very closely at. The IP may well certainly would bring in an independent valuer to assess how the value of that IP could be realized and for whom, et cetera. But it goes back to your point that in an Insolvency process where the company has gone into a process in the UK and there is a realization of assets, then it could well be the case that the Insolvency practitioner does sell to Nicholas or Nicholas's offshore vehicle for an appropriate value.
Speaker 1:Okay, so what are the various options that I have? I've heard of CVA and administrative issues and so on that you get into. What are the various different options do I have as the owner of the company?
Speaker 2:Well, it goes back to again my very first comment, which was it depends upon your aims and objectives as the owner of the company as to whether you're looking towards rescuing the company or rescuing the business. And that will one be dependent upon your aims and objectives, but also an assessment of the insolvency or otherwise of the company. I want the creditor base is what stakeholders would say, or otherwise. So what you would look at first and foremost is if there was a wish to save the company. There are a couple of procedures one could use. One is a company voluntary arrangement and one is a restructuring plan. Restructuring plans are a little bit more of a more recent introduction into our legislation, but they do something very similar to a company voluntary arrangement. So I'll explain that first.
Speaker 2:A company voluntary arrangement is an arrangement with the company, with its creditors. It's a simple arrangement to say well, I will either pay you some pence in the pound or I will sell some assets and you will have the benefit of those assets. That's sort of an arrangement or compromise, and the creditors who are unsecured vote on that, and if 75% in value vote in favor, then the minority creditors are also bound to the plan. And as long as the company keeps the plan, then they are released from the debt. So rather the debts are compromised within the terms of the CVA. A restructuring plan does something very similar, but it's a wider application. It can also include other classes of creditor and can also include shareholders. So it's a bit like a scheme of arrangement, a company act scheme arrangement crossed with a CVA, and so you have different classes of a creditor or a stakeholder, each of whom who vote within their class as to whether they approve. If there is a class of creditor who do not agree, they can be crammed down, they can be compromised with appropriate application to court.
Speaker 2:So we're seeing that a little bit more grouping into the insolvency regime. We're seeing more uses of that. We're still in the sort of 30 to 40 processes used so far, but they're going to have increasing application of the crammed down. Now this is important because it saves the company. These are processes that save the company and one of these things very carefully as to why you might want to save the company. There may be tax losses which might be useful to carry forward. There may also be licensing, that if you go into a formal insolvency process the license disappears. So there could be really good advantages of keeping the company alive, but that does depend upon creditor agreement on the basis that we can't get credit to agreement, but we believe the business is actually still viable.
Speaker 1:So what's the alternative to the CVA or restructuring arrangement?
Speaker 2:Well, that's those entirely. If you've got a business that is viable, one can look towards rescuing the business as opposed to the company itself, and the primary one of those is administration. While administration can rescue the company and see the return of the company to its shareholders, in the vast majority of cases administration sees a sale of the business and assets to a third party or to a connected party. And that going concern sale of the business, which is generally what administration does, a going concern sale, will raise more for the creditors because it hasn't seen the cessation of business. It's seen a continuation of business. And the way that you do that is that the administration first provides for a moratorium against creditor action. It allows for a breathing space, it allows a plan to be drawn together and while that planning is being drawn together, whether it's a sale or otherwise, creditors can't take action and then the sale takes place.
Speaker 2:There is something that many people will have heard of in this context is a pre-arranged administration. That's a slightly different beast. That's one where the negotiation for the sale of the business and asset takes place prior to the administration, but it's completed at the point of administration. And why you do that is because it allows complete continuation of all of employee rights trade. It allows no, we sometimes call it the melting ice cube theory of insolvency. You have a business and as soon as you put the spotlight of insolvency upon it, the ice cube survives, the melt, the value dissipates away, and that is something to try and avoid. So a pre-pack, and avoid that, because from day one the creditors, the suppliers, the customers, the employees, from day one will simply be saying well, the administration has occurred, you've now got a new owner, the new owner is now able to capitalise the business and off you go, you've got a successful, successfully rescued business. So a pre-pack has a lot of advantages.
Speaker 2:Where pre-packs come into a lot of criticism is where the sale is to a connected party, ie the former management, which might well be the issue here. And so there's a couple of bits of regulation which are restricted in the use of pre-pack administrations, or rather regulating them. The first is that the administrator must report the creditors immediately upon appointment, justifying his actions to why he didn't do a period of administration, why perhaps the business wasn't marketed in a normal way. And also, prior to the sale, the proposed purchaser must go to an independent evaluator. That evaluator looks at the proposed pre-packaged sale, also looks at the business going forward and effectively signs off as to whether they think it's an appropriate use of the insolvency processes. So those two things are there to try and provide comfort to the creditors but also to ensure that the new business and the new management team have justified their behaviours.
Speaker 2:So a pre-packaged administration is very often the thing we see, we talk about very often. But there is the alternative If administration is just simply inappropriate because there isn't really a trading business that needs to continue, then one could put the company into liquidation and simply liquidate the assets. It depends upon the nature of the business, the purpose that you have behind it, going back again all the time to well, do you want the company saved? Do you want the business saved? Is it just the assets you're interested in? Is there a business underlying business that you want, or is it just the assets? And if it's just the assets, it may well be the case of a liquidation sale.
Speaker 2:So they're the sort of processes that are available at that point.
Speaker 1:It sounds to me as though there's a need for transparency in everything that you're doing, as opposed to not telling people what's going on.
Speaker 2:Yeah, I couldn't agree more. I think there is transparency throughout the whole process in terms of valuation, for instance, in terms of looking at your asset base, ensuring that independent valuation has been obtained so that there is a justifiable course of action. The transparency, as well, after the deal is, as I've indicated, through the report to creditors, through the evaluator report. But sometimes there is an element of wanting to keep the fact of insolvency, the fact of the difficulty, away from the creditors. And I have to say at this point it's quite a difficult thing for directors to balance. Because I would say be transparent, be upfront with your creditors, inform them what your intentions are, because you may have a proposal that they might want to agree to, but at the same time, you're recognising the moment that your creditors lose confidence in you.
Speaker 2:You might have all sorts of enforcement action. You can have bailiffs turning up or courting for some officers, as they're now called, turning up at the door. You could have creditors seeking to wind up the company, to get their money back. You could have banks taking action. So there's a whole raft of different stakeholders who could take enforcement action the moment you start talking to them about your plans. But I have to say. That's one of those things that we're trying to set right at the very beginning what's the aim of objectives, who are the stakeholders, who are their interests, where are you likely to see support, where are you likely to see opposition? And managing that process carefully is really, really important because, as we go back to, there's an overriding duty to the creditors.
Speaker 1:And you talk about creating a moratorium when you actually appointed an administrator or whatever there's, the creditors' rights are prevented from being enforced. But if they actually you know, you've told your creditors I've got problems and you then get a writ, for example, what can you do in terms of timing? How quickly can you actually put the company into administration to prevent the rits being enforced?
Speaker 2:Yeah well, that's an interesting one because there's the law tries to balance the interest of the creditors to take action against the ability of the directors to try to rescue the business for the best interest of the creditors. So there is a balancing act to be had. So, for instance, an administration, if a winding up petition is filed, then the directors cannot put the company into administration themselves out of court, through an out of court process. They have to go to court and they have to persuade the court, with probably the petitioning creditor there as well, making representations, and persuade the court that it is in the interest of everyone to put the company into administration. If that hasn't happened, if there wasn't a winding up petition, it's the directors have an ability to, as we say, appoint out of court and that's simply a filing of notice at court of their appointment of an administrator. At the same time the administrator has to give his consent to the appointment, etc.
Speaker 2:There is another element as well, sometimes a notice of intention to appoint an administrator, and that can be used where there's a qualifying floating charge holder, a secured creditor. In front of everyone, they have to be given notice of the intention to appoint an administrator. They could take their own action at that particular point. But the answer is your ability as a director to act is dependent upon how long you've got how what creditor action has been taken. So in the absence of creditor action, such as a winding up petition, it can be immediate, it can be a day, it can be literally within the hour, provided you've got an insolventy practitioner who's willing and able to take the appointment.
Speaker 1:Yeah, so that's somebody you need to get hold of in advance, really so that you can go to?
Speaker 2:Yeah, they're not going to put their name to an appointment unless they are persuaded that administration is in the best interest of the creditors and that it is viable. So you're absolutely right although you might have creditor action, you've got to have lined up your insolventy practitioner. And that goes with getting advice as to duties, responsibilities. And it may well be that there may be a rescue plan that avoids insolvency, that the fact of getting new money in is maybe enough. But you have to have a plan B that if that money doesn't come in well, what do you do? And having an insolventy practitioner lined up ready to go if needed is probably the most prudent course of action you can take.
Speaker 1:Very good. Well, thank you very much, vernon. Thanks for joining me today. That was really interesting. I'm sure Nicholas would be extremely grateful for these insights and he might have some more questions for you when we all meet again on the 23rd of May at the IBSA annual conference, where we'll be talking about these as well. Details, of course, are on our website at theibsaorg. So now I'm going to change back again from Nicholas to voice orders and conclude this podcast by thanking you all for listening.