Money and debts can cause business owners running for the hills. No-one likes or aims to fall into financial difficulty, and so we do our best to avoid it. Speaking with Robert Festenstein, we discuss refinancing options for businesses, alongside the best routes when insolvency is getting too close for comfort.
Many businesses experience financial difficulties when trading; is insolvency an inevitable consequence or are there other options available that can keep the business going?
Insolvency does not necessarily have to be the inevitable consequence for a business experiencing difficulty. When a business hits a series of financial difficulties it is often not the best course of action to go straight to an insolvency practitioner, but to a specialist insolvency lawyer instead. It is often more effective for a lawyer to follow–up on, for example, the chasing of aged debts which might be the primary reason the business got into difficulty in the first place. Also, in cases where cash flow is the problem, perhaps caused through business inefficiency, there are a number of options available that can keep the business trading.
It has to be kept in mind that financial difficulties do not necessarily mean insolvency. Using the legal route means you can often make credible arrangements with creditors such as HMRC and landlords to enable the business to keep trading.
Cash flow is often named as a key factor for businesses struggling to stay afloat. What are the refinancing options available to businesses in order to ease cash flow problems, assuming the cash flow problem is temporary?
Factoring services and invoice discounting can be useful but can be expensive if not managed correctly. And if you have a history of clients who don’t pay on time or who always have to be chased for payment, money can be clawed back from you in the event of clients deciding not to pay your agents.
Can you outline the options available for formal insolvency proceedings?
In essence there are three options. Firstly, there’s voluntary liquidation, which is the last resort where the business is, in essence, unrecoverable. All funds and assets, existing and due, go to the liquidator and is divided out between the creditors. The implications of this are the future difficulties faced by directors if there are disqualifications, as well as professional body disqualifications. Administration is a more viable option for a business that is otherwise acceptable, but perhaps has one major creditor causing financial instability. The company goes into administration and is sold – “pre-packed” – at a fixed fee. This can work well in order to preserve a business and jobs, but at times has been known to be abused by the insolvency professional with excuses given such as: “we obtained the best price at the time”, and “there were commercial sensitivities surrounding the sale”.
Finally, the Company Voluntary Arrangement (CVA) is the third option whereby creditors are approached with an offer of payment of sums owed over time to settle due bills. This allows the company to continue trading while in a formal agreement to pay off its creditors. I’m not too sure of the success rate of CVA’s, but I am aware it is a far better resolution than just writing off a business and the potential livelihood of its owners.
This is why people should always see an insolvency lawyer first! We have saved businesses that would have otherwise been written off.
Which sectors experience more than their fair share of insolvency proceedings in the UK? Why do you think this is?
It may seem obvious, but sector insolvency is very much at the behest of the prevailing circumstances! Market forces and changing technology have such an impact on business nowadays. Travel and estate agents have, for example, been affected by the proliferation of internet comparison sites; the licenced trade has been affected by hardened drink-driving attitudes and avaricious pubco landlords. Even the legal profession is not immune, with rising costs and decreasing fees, and I see there being a case for some lawyers to actually bite the bullet, so to speak, and take legal advice themselves from fellow lawyers, such as ourselves, as experts in dealing with financial difficulty so as to avoid the inevitable.
No profession is immune! To this end, as a practice, we provide not only insolvency services but also commercial advice based on restructuring, downsizing or new business options that we identify as being most suitable for the business.
Do you see any need for legislative change regarding insolvency?
The problem is that legislative change at one end tends to cause different problems at the other end! Currently, for example, the procedure for challenging insolvency practitioner fees is far too complex. Making it easier, in my view, could introduce a host of disproportionate other challenges being made available that would cause nothing but turmoil.
You founded RHF Solicitors in 2001 – what were the goals that you arrived with when founding the company? 16 years later, do you feel like you’ve achieved them?
I wanted to be my own boss, run my own business and be in control of my own destiny. The challenges were perhaps greater than I anticipated, but 16 years later I’m still in business, which speaks volumes!