What Insolvency Options are Available For Distressed Retail Businesses?

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:

1. Rescuing the company as a going concern.
2. Achieving a better result for creditors than liquidation would.
3. 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.

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.

As a last resort, a company may opt for CVL, 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.