The numbers above and graph below graphically demonstrates the impact the current economic slowdown has had on corporate failures. During 2008, approximately 1 in every 150 companies (0.7%) went into liquidation, which is still less than was recorded in 2002. The big jump is of course the number of Administrations which doubled compared with the previous quarter and for the year were also almost double that compared with 2007. My article elsewhere in this Newsletter about pre-pack Administrations is very timely.

It is generally accepted that 2009 is not going to see a change from this trend but we will have to wait until May to see the next set of numbers to gauge how difficult things have become for business owners.
 

After a period of declining personal insolvency numbers since the end of 2006, the number of personal bankruptcies and individual voluntary arrangements has increased during the second half of 2008 to reach the unprecedented highs of 2006 at 106,544 for the year. Given the current economic climate and the increasing levels of redundancies, it must be assumed that we are likely to see this figure exceeded during 2009 but by what margin is impossible to predict.

The Enterprise Finance Guarantee (EFG) Scheme was launched on 14 January 2009 by the Government as part of a number of initiatives to kick start the economy and in an effort to stimulate bank lending to businesses. EFG aims to help smaller businesses, currently struggling to secure finance, to get bank loans of £1,000 to £1 million repayable over 10 years and is open to businesses with an annual turnover of up to £25m and will operate until March 2010.

The scheme aims to help credit-worthy companies access the finance they need for working capital or investment, in circumstances where such finance may not otherwise be available to them due to the current tight lending conditions. Most businesses in most sectors will be eligible for the scheme, however, state aid rules exclude businesses in the agriculture, coal and steel sectors.

The aim of EFG is to provide further working capital in the form of new loans and can also be used to convert existing overdraft facilities into formal loans. In respect of overdraft conversion, an appropriate level of overdraft facility must remain in place, based on the requirements of the business, to ensure more working capital is available to the business in total. In addition, the business must be able to show that the new funding is serviceability.

Under the EFG scheme the Government will guarantee 75% of any loans made, with the bank covering the remaining 25%. The guarantees will mean that the Government, or taxpayers, will pick up three-quarters of the tab for any bad loans, if no personal guaruntee has been given.

In total, the Enterprise Finance Guarantee Scheme will see the Government provide £1 billion of guarantees to support to £1.3 billion of bank lending.

Many of the businesses that we are seeing at the moment are fundamentally good businesses; the problem is cash flow problems. If EFG delivers what it promises, this scheme may lead to the survival of many businesses that would otherwise fall into an insolvency process. For this to happen, it is vital that advisors understand EFG and that bankers at a local level can access the available funds quickly and efficiently. 

Pre-packaged Company Administrations, (“pre-packs”), have hit the headlines in the last few weeks as the recession continues to bite and as a result of new guidelines that have been issued to Insolvency Practitioners (IP’s). The Insolvency Service, the government regulator of the profession, forecasts as many as 100 pre-pack administrations every month as the recession continues.

A pre-pack is where, via an Administration, a sale of a company’s business and assets is arranged prior to the appointment of an Administrator, with the deal being completed after the appointment of an Administrator without the company being offered on the open market. The buyer is often, but not always, the incumbent management or owners.

Critics question the level of transparency a pre-pack affords, because a buyer is arranged before the company is put into Administration and where companies are often able to write off substantial amounts of debt, or even all of it, without consulting all the creditors. In addition, as the business is sometimes returned to the incumbent management, there could be a risk of secondary failure in the same hands.

Opponents of pre-packs are concerned that creditors are rendered powerless by the process. Creditors will not be able to recover money owed from the new proprietor even if, as in many cases, the business effectively remains in the same hands. Others have suggested that suppliers are also left in the dark and out of pocket, since in pre-pack deals, supply contracts are effectively rendered null and void without any notice.

The insolvency regulators, working with the insolvency profession, have now published guidelines to IP’s which must be adhered to when advising on or completing pre-packs; Statement of Insolvency Practice 16 (SIP 16). Failure to comply with SIP16, which came into effect on 1 January 2009, can result in disciplinary action against IP’s.

The guidelines reiterate that IPs, whether acting as an adviser to a company, as its Administrator, or in both capacities, must take into account the ramifications of the advice they give to the company and all stakeholders.
In the interest of transparency, Administrators must disclose to creditors upon completion of a pre-pack any valuations obtained on behalf of the company and details of assets involved in the pre-pack transaction. Administrators are also required to provide details of the alternative rescue processes that were considered but later abandoned in favour of the pre-pack and the possible outcomes if they had pursued any of those avenues.

Administrators will also have to explain why the pre-pack was selected as a sale option and why it was deemed appropriate in each instance over a standard insolvency proceeding. They must also take steps to avoid “unnecessarily harming the general interest of the creditors”. Although the Administrator has the authority to sell assets without the prior approval of creditors or the courts, they may later be challenged over their actions.

It is expected that these new guidelines will add a new level of transparency to the pre-pack process and give a greater understanding to those affected as to why a pre-pack was necessary and how the values achieved were arrived at. 

Thank you to everyone who submitted an entry to our Christmas Caption Competition, they certainly kept us entertained in the office.

Congratulations to Sherod Williams, Partner at Walker Thompson Accountants and Registered Auditors, who won a bottle of champagne for his winning entry below:

“The Cranfield Hillbillies embraced the concept of Blue Grass Music with their version – Green Grass”

December also saw the esteemed Cranfield Carting Challenge Cup handed over to its worthy new owners, 2008 winners Brindley Twist Tafft and James.

Partner John Ward and other members of the team were at our presentation evening to pick up the well deserved prize.

This year's Carting challenge begins next month so look out for all the latest competition updates in the next newsletter.
 

2009 will also see the return of our TechBite LIVE seminars which aim to give helpful hints and tips to professionals on how to deal with clients facing insolvency issues.

If you were unable to attend one of our seminars in 2008 but think that your team may benefit from receiving our in-house presentation sessions they are available on request. For more information on our seminar topics please contact us or see our website for more details.
 

In June 2009, Cranfield Insolvency Administrator Alastair will be taking part in a mountainous challenge – literally! He will be climbing Mont Blanc, which at nearly 16,000 feet is the highest mountain in the Alps.

The aim of this brave and testing task is to raise at least £5,000 for the Horton Lodge Community & Special School who provide care and education for children with severe disabilities. If you would like to read more about Alastair’s brave and worthwhile challenge please follow the link to Mont Blanc Challenge 2009 or to find out how to make a donation to this valuable cause please email: alastair.machin@cranfieldbusinessrecovery.co.uk.

P.S. Don’t forget to check our fortnightly blog for all our latest news and events at www.cranfieldbusinessrecovery.co.uk/blog.