The retail sector has been facing difficult market conditions recently. Statistics show that the number of retail insolvencies has increased 19% in the past year, from 1,843 in 2022/23 to 2,195 in 2023/24 (year-end 31 January).
There are several reasons why: cautious consumer spending given the cost-of-living crisis, higher interest rates, higher staffing costs due to increases in the national living wage, and higher business rates.
In this blog, our Retail and Insolvency Lawyers explore the various different insolvency options available to retailers facing financial difficulties.
Administration
Administration is a process where a financially distressed company is placed under the control of an administrator, typically an insolvency practitioner. The administrator’s role is to manage the company’s affairs, business, and property to achieve one of three objectives:
- Rescuing the company as a going concern.
- Achieving a better result for creditors than liquidation would.
- Realising property to distribute to secured or preferential creditors.
A company can enter administration either through a court order or via an out-of-court appointment by the company, its directors, or a qualifying floating charge holder. The latter is more common.
The administration process gives the company breathing space by imposing a statutory moratorium, protecting it from creditor actions unless approved by the administrator or court. This protection allows the administrator to either trade the company temporarily or prepare for a pre-packaged sale of the business and assets. A pre-pack sale is an agreement arranged before the administration that is executed soon after the administrator's appointment. This sale is only considered if rescuing the company as a going concern is not feasible.
Administration typically lasts for 12 months but can be extended with creditor or court approval. Exit routes include liquidation, CVAs, restructuring plans, or early dissolution.
Company voluntary arrangement
A CVA is a flexible option for retailers, allowing them to reach an agreement with creditors over debt repayment, usually over an extended period of up to five years. CVAs often involve restructuring debts, reducing payments, or selling assets.
For retailers, a CVA can help terminate or renegotiate leases for underperforming outlets, providing relief to struggling businesses.
A CVA is initiated by a company’s directors, an administrator, or a liquidator. The proposal must first be reviewed by a licensed insolvency practitioner (the nominee), who assesses whether the CVA has a reasonable chance of success.
If approved by 75% or more of creditors (in value), the CVA becomes binding on all unsecured creditors, even those who voted against it. Secured creditors are only bound if they agree.
Once approved, the nominee becomes the supervisor, overseeing the implementation of the CVA. A CVA can end either by successful completion of its terms or by termination if the company fails to comply, often leading to further insolvency procedures.
Scheme of arrangement
A scheme of arrangement is a more flexible restructuring tool, often used in complex scenarios involving debt restructuring, mergers, or capital reductions. Schemes can be implemented early, even if the company is not insolvent, allowing businesses to address financial difficulties before they worsen.
One advantage of schemes is that they are less publicised, reducing the risk of reputational damage.
Schemes require approval by creditors, with at least 75% in value of each class of creditors voting in favour. The court is involved at several stages, making the process more expensive than other insolvency options. A significant benefit of schemes is the ability to bind dissenting secured creditors, unlike CVAs.
While schemes do not offer automatic protection from creditor actions, courts may grant a stay of proceedings to allow time for the scheme to be implemented.
Restructuring Plans under Part 26A of the Companies Act 2006
Introduced in 2020, restructuring plans are similar to schemes of arrangement but offer additional features. Restructuring plans are specifically designed for companies facing serious financial difficulties that threaten their ability to continue operating as a going concern.
Key differences include:
- Restructuring plans require only a 75% majority in value of creditors for approval, without needing a majority in number.
- They include a "cross-class cram down" provision, allowing the court to bind dissenting creditor groups if the plan is approved by other classes of creditors with an economic interest in the company.
Restructuring plans can be used by companies of all sizes, though the complexity and cost may deter smaller businesses from opting for this procedure. Large companies with more complex financial structures are more likely to benefit from restructuring plans.
Creditors' Voluntary Liquidation
As a last resort, a company may opt for Creditors’ Voluntary Liquidation, bringing its affairs and existence to an end. CVL is initiated when a company cannot pay its debts, and its liabilities exceed its assets.
To begin CVL, the company’s directors convene a shareholders’ meeting to pass a resolution to wind up the company. This resolution requires a 75% majority, after which creditors are invited to approve or nominate a liquidator.
Once the liquidator is appointed, the company ceases trading, and the liquidator takes control of its affairs, realising assets and distributing proceeds to creditors. The liquidator also investigates the company’s affairs and the conduct of its directors, which can lead to claims of misfeasance or director disqualification.
Unlike administration, there is no statutory moratorium in CVL, though the court can grant a stay on legal proceedings if necessary.
The liquidator’s final report, detailing the winding-up process and asset distribution, is filed with Companies House, and the company is automatically dissolved three months after the report’s registration.
Contact our Retail and Insolvency Solicitors
Suppose you are a retailer concerned about your company's financial position and the risk of insolvency. In that case, our Retail and Insolvency Solicitors are ready to assist with advice on all aspects of insolvency law and restructuring practice.
We have excellent working relationships with many national, regional, and local independent insolvency practitioners whom we can recommend and be called upon to provide their professional input and assistance as and when required.
Contact us on:
01619414000
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Vicky Biggs
Legal Director
Vicky is a Legal Director in the Insolvency and Restructuring team at Myerson and has been with the firm since 2012. Utilising her commercial litigation experience, Vicky now specialises in contentious insolvency matters, advising insolvency practitioners, directors and individuals in relation to both corporate and personal insolvency issues.
Vicky advises on a wide range of insolvency matters, including claims made by administrators, liquidators and trustees in bankruptcy, director disqualification proceedings, remuneration approval applications, retention of title claims, validation orders, bankruptcy annulment applications and winding-up and bankruptcy petitions.
About Vicky Biggs