The news that Wilko is going into administration has shocked the retail sector. The family run business was founded in 1930 as Wilkinson's by J.K. Wilkinson is now in the position of reducing the numbers of its retail premises, down from the 400 retail units it previously boasted of. At the present time Wilko is staring into the abyss of either going into administration or considering a CVA (Company Voluntary Administration).

It appears that Wilko made the same fatal error that many companies have before them of trying to borrow their way out of difficulty, having allegedly borrowed £40 million from Hilco, the retail turnaround fund.

At the present time Wilko is staring into the abyss of either going into administration or considering a CVA (Company Voluntary Administration). Many businesses tread the well-worn path to insolvency, as has Wilko, by failing to act decisively as soon as the first signs of financial distress appear. A business can often be restructured and saved, enabling the company to trade into a better position over time.

Olu Ajasa, a partner, pointed out "whatever the reason for the problems, whether a large client has failed to pay their invoices, or acommercial dispute is taking up time and money, waiting until the very last minute to act after you recognise the business is in trouble is the worst option." Olu further comments "taking drastic action is often painful as it may involve widespread redundancy, selling assets as well as negotiating with the bank and the tax man, which can be challenging. Taking expert advice from an insolvency lawyer and an insolvency practitioner at the earliest stage frequently ensures that the business can stay afloat in some form."

A company that finds itself in the situation where insolvency looms will require the services of an insolvency lawyer and insolvency practitioner to work to together to attempt to find the best route to either save the business or if necessary, conduct an insolvency procedure. Giambrone & Partners experienced insolvency lawyers have a wealth of experience in assisting companies to rebuild after financial difficulties.

If creditors are pushing for insolvency there are various options to rescue a company and create a different structure. There are various routes that can be taken to achieve this.

Moratorium under the Corporate Insolvency and Governance Act 2020

The moratorium was introduced by Corporate Insolvency and Governance Act 2020 (CIGA 2020) to provide a period of time for a struggling business to review the options. The directors of the company concerned present the court with an assessment of the position and a licensed insolvency practitioner who agrees to act as a monitor. If granted a moratorium lasts for 20 days and can be extended for a further 20 days. It should not be used as a delaying tactic; it should only be applied for if there is a genuine belief that the company has a chance of being saved. The company can still trade during the moratorium but it may not seek additional funding or dispose of any assets without the permission of the monitor. Any debts acquired during the moratorium do not have to be paid until it ends. However, staff salaries must be paid, also rent and any costs involved to enable the company to provide goods or services to customers.

Whilst the moratorium is in place it protects the company from the following actions:

  • Insolvency proceedings
  • Any action by secured creditors to repossess goods
  • Litigation cannot be brought against the company
  • Existing litigation is halted
  • The majority of the company's existing debts are put on hold
  • Landlords cannot take any action against the company.

A moratorium is not a solution but it provides "thinking time" and the monitor's guidance. If a rescue plan has not been formulated during the moratorium another path must be taken.

Restructuring Plan under the Corporate Insolvency and Governance Act 2020

A restructuring plan under the CIGA 2020 provides, as the name suggests, for the restructure of the financial aspects of a company, refinancing, debt rescheduling, restructuring secured and unsecured debts and also providing new funds that can be applied to developing the company and not past debts.

The creditors are allocated into different "classes" related to the rights that they have against the company. They are invited to vote on the proposed plan and if 75% of a class are in favour that signals the approval of that class.

Not all classes have to approve the plan as long as the classes that do not approve will not be worse off under the plan than under an alternative procedure. This is known as a cross-class cram down. Dissenting creditors can be overlooked by the courts. This procedure assists in enabling a company to continue as an active business.

Company Voluntary Arrangement (CVA)

A company voluntary arrangement (CVA) comprises of an arrangement between the company and its creditors to repay its debts. It reshapes the company's ability to pay its debts. It has the advantage of enabling the directors to remain in control under the management of a licensed insolvency practitioner together with an insolvency lawyer. The customers of a company operating under a CVA do not have to be told, it is an arrangement between the company and their creditors.

When a CVA is agreed all legal action against the company from its unsecured creditors ceases. The directors conduct leading up to the CVA is not examined, removing the potential for accusations of wrongful trading. A key factor is obtaining the support of the requisite numbers of creditors, which means the CVA must be drafted extremely carefully. The insolvency practitioner will act convene the meetings and as nominee and will issue a report to the court and all the creditors detailing the attendees and outcome of each meeting.

A CVA does appear against a company's credit and it is a flexible arrangement between the company and its creditors. Secured creditors are not bound by a CVA.

Administration

If a company is in financial difficulty, it may be put into administration where a licensed insolvency practitioner will take over the running of the company. The objectives of the administrator are to rescue the company and re-establish it as a going concern in order to obtain better prospects for the company's creditors than if it was wound up and liquidated without the opportunity of going into administration.

If these objectives are not possible, the assets and any property are then realised to enable the distribution of the money arising to secured and preferential creditors. The administrator must explain which of the objectives is being employed in the decision to place the company in administration.

The company can be put into administration by the directors and shareholders of the company or by the holder of a qualifying floating charge. There are two routes of securing administration, namely (1) the out of court route (2) the court route. Subsequent to the appointment of an administrator the company is run by the administrator.

Administration is not designed as a permanent solution; it is a holding period while the administrator attempts to find a permanent solution. If a viable solution cannot be found the company will be liquidated.

Giambrone & Partners can assist distressed businesses at any stage and provide advice and guidance to support the company in attempting to recover from its position.

Olu has extensive experience and expertise in all types of alternative dispute resolution for commercial issues, as well as commercial litigation. Olu advises on complex, high-value, domestic and multi-jurisdiction matters.

He reputation for assisting clients in complex cross-border commercial disputes, shareholder disputes, partnership disputes, contractual disputes, loan facility agreements, secured lending, both corporate and insolvency relating to individuals. Olu has expertise in resolving real estate disputes (commercial and residential) and landlord and tenant law (commercial and residential).

Olu also has considerable experience in corporate and personal insolvency matters, including preparing and responding to statutory demands, winding-up petitions, investigating company directors and also assists with all aspects of corporate insolvency litigation.

Olu is highly regarded by his clients for his resoluteness in satisfactorily concluding complex disputes swiftly and in line with their commercial objectives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.