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Rescue, Recovery, and Closure Options for Retail Businesses
Retail, particularly high street retail, is a sector which has long been experiencing financial and operational concerns. The past few years have seen many established high street names being liquidated or else entering formal insolvency proceedings such as administration and Company Voluntary Arrangements (CVAs) when the pressure has got too much.
While there has long been a growing gulf between high street stores and their online rivals, the past few years has widened this gap further, with more and more consumers turning towards the internet to make their purchases remotely. This has piled the pressure on retailers, with the cost of operating a bricks and mortar store steadily increasing while trade is declining.
If your retail establishment has suffered a downturn, you may be wondering whether your business has a future. If your retail shop has become insolvent, or is in danger of falling into the red, it may be that placing the company into liquidation is the most appropriate next step. However, liquidation is not something to be entered into lightly. It is a major step to take and is irreversible in the majority of cases without huge expense to reinstate the company.
An insolvent company can be liquidated either due to legal action from disgruntled creditors, or at the director’s own request. A court-ordered liquidation is known as Compulsory Liquidation, whereas a director-initiated liquidation is done through a process known as a Creditors’ Voluntary Liquidation – or CVL. While it may seem counter-intuitive for a director to place their own company in liquidation, in many cases it is the most appropriate course of action.
Once a company becomes insolvent, its directors have a legal obligation to place the interests of the company’s outstanding creditors above those of the company and its shareholders/directors. This means creditors' positions should not be worsened or their losses made any greater. In some cases, this will mean an insolvent retail business will need to close its doors immediately in order to preserve the value of the business and the stock. In other cases, however, the store may be allowed to continue trading if it is deemed this would benefit its creditors.
This is an extremely complex area, and the penalties for not adhering to your responsibilities can be severe. If your retail business is insolvent, you should make it a priority to seek advice from a licensed insolvency practitioner. An insolvency practitioner will be able to take an independent view of your retail company, its financial position, and likely future prospects, and determine whether liquidation is suitable.
While liquidation may not be something you are keen to consider, for those retailers who have reached the end of the road and are seeing their debts spiral out of control, it can be the most sensible option. Liquidating your company through a CVL will ensure all creditors are treated fairly, your staff will be able to claim redundancy, and any outstanding borrowing will be written off unless you have previously provided a personal guarantee.
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For many retail businesses in trouble, particularly those which have only begun experiencing financial difficulties in the wake of the continuing coronavirus crisis, there are ways of saving the company and getting the business back on track.
All companies are different and face their own unique challenges and therefore each company should be treated as the individual entity it is when a rescue plan is being formulated. This is especially important when dealing with retail businesses who often have complicated structures, online and offline arms, as well as multiple stores, branches, or franchises.
If your retail business has experienced a dip in profits, it may be possible to rescue the business – or at least part of the business – through a process of operational and financial restructuring. For those retailers who operate from a number of stores, an exploration of business simplification could help to highlight the ways in which the company could be streamlined to improve efficiency. Unprofitable areas which could be wound down will be identified, allowing both funds and resources to be diverted to more profitable areas of the business. This can immediately free up cash flow, improve profitability, and prevent the rest of the company being dragged down by non-performing arms.
For retail businesses who have fallen into arrears with creditors, a Company Voluntary Arrangement (CVA), may be considered. This involves entering into formal negotiations with creditors – including landlords and HMRC – with the aim of reducing monthly repayments to a more affordable and sustainable amount. This provides an opportunity for a financially distressed company to enter into discussions to renegotiate lengthy and costly lease agreements with landlords, as well as potentially having a portion of their debt written off by trade creditors.
In order for a CVA to be implemented, however, at least 75% (by value) of the company’s creditors must agree to the proposals. As a CVA relies on a company continuing to trade for at least the length of the agreement, which is typically 3-5 years, it is vital that creditors are convinced of the long-term viability of the retail business. CVAs therefore are only suitable for those retailers whose precariously financial position can be turned around.
Your insolvency practitioner will assess your company’s eligibility for a CVA before a proposal is drawn up and presented to creditors; if the insolvency practitioner does not believe a CVA will be accepted, they will explore other options which may be able to save your business.
This may include placing your retail business into administration particularly if the company is being threatened with litigation action from creditors. A company in administration is granted a moratorium which protects it from legal action, including from creditors threatening to issue a winding up petition which may result in the company being placed into compulsory liquidation.
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