THE usual greeting of "happy new year" may have sounded a tad hollow this time round, as 2009 will present some harsh economic challenges.
Fears are growing that Britain could be plunged headlong into a recession on a par with the dark days of the early 1980s. The first quarter of any year, after the euphoria of Christmas, is always a difficult time with an inevitable slowdown in tradin
g for the retail and licensed trade sectors. This year it will be particularly bleak, with the likelihood that significant names in those sectors and others, many of them chains, will sink into administration.
Some retailers did not even manage to get through the generally busy festive period. One of the most high-profile chains to go into administration was Sir Tom Hunter's USC fashion brand. PKF was appointed as its administrator last week, although Hunter rescued 43 of the better-performing stores through a new company, Dundonald Holding. Another recent victim on the high street is Adams, a UK children's wear retailer with 260 outlets across the country, which applied to go into administration just after Christmas.
There are more casualties to come. Consumer confidence has plunged to its lowest level in a quarter of a century. Those companies which just about got by as a result of the December sales will find life tougher come early January. The utility bills and credit card statements landing on doormats will deter even the most optimistic consumer from any unnecessary spending. Purchasing power will be at a low ebb.
Against this bleak backdrop many businesses, not just retailers, will enter administration. But what does that involve and what are the pros and cons of going down that path?
When a company is insolvent and falls into administration, it is immediately protected from creditors and further legal action. A licensed insolvency practitioner is appointed who has the job of deciding the future of the company. The process buys the company time and enables an emergency strategy to be formulated and implemented.
If the company is fundamentally sound a recovery plan will be prepared with the aim of making the business more efficient and maximising profits. If there is little in the way of assets, poor cash flow and no obvious future then liquidation may be a more appropriate way forward.
An administrator may be appointed by a court order, the holder of a 'floating charge', the company or its directors. No matter how they are appointed, the administrator has a duty to act in the interests of all creditors.
The administrator takes control of all company property and presents proposals to creditors no later than eight weeks from the date of their appointment. These proposals will include full details relating to the appointment, and the circumstances leading up to it, as well as exactly how the administrator proposes to achieve their objectives, including details of how they anticipate the process will end.
The main purposes of administration are to rescue the company as a going concern or to achieve a better price for the company's assets as a whole than would be possible if it was wound up. If neither of these are possible, the aim is to realise the value of property to make a distribution to creditors by collecting and selling the assets for the best price.
When a company enters administration any pending winding-up petitions or legal proceedings will be dismissed or suspended. The administrator will require one or more of the current or former directors or company officers to provide a statement of the company's affairs. This details the company's assets and liabilities, including those assets that are subject to any fixed or floating charges. A copy of the statement of the company's affairs, or a summary of it, must be attached to the administrator's proposals. The administrator must send a notice of appointment to the company and each of its creditors and publish the notice in the Edinburgh Gazette, the official journal of insolvency, and a newspaper in the location of the company's principal place of business.
A company may already have agreed to a 'pre-packaged sale', as USC did. This means that the firm, prior to administration, negotiated a sale of its assets to a new company or a third party. The administrator, on their appointment, would then complete the transaction. A pre-packaged sale is designed to reduce publicity and cut the costs of the process.
An administration normally takes 12 months to complete, but this can be extended.
There are a number of advantages associated with entering administration. It can be a useful tool for insolvency practitioners to control the company, banks and creditors to ensure ongoing survival of the business. Administration prevents all legal actions and stops the financial position getting worse and putting directors at further risk. It can be very quick and cost-effective if a pre-packaged sale is used properly.
Entering administration means a company is protected by court while a 'going concern' buyer is sought. This can be helpful if certain parts of the company are poorly performing but it has profitable subsidiaries which can be sold.
As far as creditors are concerned, the appointment of a licensed insolvency practitioner ensures that all claims are considered equally. Protection from creditors can allow the administrator time to negotiate a deal to achieve their end objectives, which may include selling the business, thus protecting jobs and goodwill.
Finally, the administrator is under a duty to achieve the best price possible for the assets of the company, whether through a pre-packaged sale or on the open market.
However, on the down side, an administration becomes public knowledge. As it must be advertised, predatory investors may be attracted who will be looking for cut-value assets. Financing trade and other supplies can be difficult unless adequate resources are available or new funds are found in the administration period.
Given the economic outlook for this year, more businesses look certain to go through the process of administration.
• Ken Pattullo is a partner with business recovery and restructuring specialists Begbies Traynor
