What Business Rescue Options are Available in Scotland?May 11, 2017
All businesses will experience challenges and tough times during their lifetime. If your business is struggling, what matters isn’t that you’re insolvent or heading for insolvency.
What matters is how you respond to those challenges.
In this blog, I will run through a number of different business rescue options available to businesses in Scotland. For each option, I will try and explain what it is, how it works and suggest where it is best used.
Before I get started, though, it’s worth highlighting that businesses can take a number of different legal forms, including sole traders, partnerships and limited companies.
Certain rescue options are available to some legal forms but not others. For example, the Business Debt Arrangement Scheme is only accessible to businesses run by individuals and partnerships
The particular legal form is not what is important to a business rescue (a skilled business rescue professional/insolvency practitioner can use any of the legal forms to help rescue a viable business). The most important factor is for the business owner to acknowledge that they need appropriate rescue help and advice at an early stage. The earlier advice is taken the more options that are available and the greater the chance of success,
An informal rescue is a voluntary arrangement between a business and some or all of its creditors. Because it’s informal, any agreement made is not legally binding or enforceable upon involved parties.
Informal rescues often work best where the number of creditors being engaged with is very small or the business is still trading reasonably well (albeit beginning to struggle) and doesn't yet need any help from its suppliers and creditors.
Often businesses will seek assistance from company doctors, a business rescue specialist who is appointed to provide professional advice and, ultimately, turn the failing company around.
Sometimes a rescue specialist is appointed in a purely advisory capacity. In other cases, they are formally hired and tasked with taking direct control of the company as its managing director.
Once a rescue specialist has been appointed, precisely what they do can vary tremendously.
While one business might require some simple internal changes, another may need to restructure their debts, reduce their interest rates and experiment with the conversion of debt to equity.
The ideal outcome of an informal rescue is the business returning to profitability and continuing to trade.
Unfortunately, this doesn’t always happen.
Sometimes directors leave it far too late to seek help and a rescue isn’t possible.
Formal procedures differ to informal options in that they involve legal processes, an insolvency practitioner and the agreements made during the process are legally binding on involved parties.
There are four common formal rescue options available to businesses in Scotland: Company Voluntary Arrangements (CVAs), Administration, Liquidation and Business Debt Arrangement Scheme (Business DAS).
In the sections below, I’ll provide a short description of each formal rescue option and explain where I would recommend their use.
Company Voluntary Arrangement (CVA)
A CVA allows an insolvent company to write off some of its debts, restructure itself and repay the remaining debt over an agreed fixed period.
This, in theory, allows a business to reduce its monthly expenditure and increase the likelihood of long-term survival.
While CVAs are an excellent starting point for business recovery, many see them as an instant solution and this almost always leads to negative outcomes.
In our blog post A company voluntary arrangement will not save your company, we highlighted the extremely high failure rate of CVAs.
Of the 177 CVA cases surveyed, only 14% of companies in the sample remained active with a further 13% of CVAs still to conclude.
This clearly shows that CVAs are not the silver bullet many people think they are.
However, used as part of a larger business recovery strategy, a CVA is an invaluable tool and can help to deliver a positive outcome for businesses.
Business Debt Arrangement Scheme (DAS)
If you run your business as a sole trader or a partnership, there is an extra business rescue option available to you.
The Business Debt Arrangement Scheme (DAS) is a statutory debt management plan available to businesses in Scotland. The scheme allows you to avoid insolvency altogether while still gaining protection from your creditors.
In practice, a Business DAS allows you to pay off your current debts over a longer period without the threat of legal action from your ordinary creditors. Once the Business DAS has been approved by the creditors all interest is frozen and creditors are not allowed to add any fees, penalties or other charges.
Unfortunately, just having more time to pay your debts is rarely enough to actually rescue a business on its own.
There is a reason that a business has amassed debts that it cannot deal with and the Business DAS doesn’t change that. With the help of an insolvency practitioner, the business will also need to implement significant changes to improve its trading while under protection from creditor action.
It is worth noting that a Business DAS must be administered by a professional who is FCA-regulated and a licenced insolvency practitioner. Not all insolvency practitioners are FCA-regulated so it’s essential you check whether they can administer a Business DAS.
An administration is a formal insolvency process designed to provide a better outcome than a liquidation.
An administration can be thought of as throwing a safety net over a business to protect it from its creditors while the administrator (who must be an insolvency practitioner) assesses the business and tries to rescue it. The administrator takes over control of the company and, in effect, replaces the directors.
During an administration, the creditors (including landlords and HP companies) are restricted in taking any action against the company and normally can last up to 12 months (although this can be extended).
Liquidations have a bad reputation. People think a liquidation simply involves shutting down companies and cutting jobs. While this is often the case, it is not always.
If there is a viable business involved and the liquidator is a suitably experienced turnaround professional with the will to take some risks and put in the effort, a liquidation can still result in the rescue of all or part of the business.
Is Your Business in Trouble?
The insolvency industry has a bad press image. Normally the press only reports the bad news in relation to insolvencies, focussing on the job losses rather than the jobs saved, the shut downs rather than the going concern sales.
The successes — the businesses that have been rescued and jobs that have been saved — simply don’t get column inches because that doesn't sell papers. Also, much of the rescue work is done behind the scenes and is confidential.
Insolvency does not mean the end.
It’s just as important to realise that no one form of business rescue is better than any other. They’re all just tools and how effective they are depends on who is using them and how much time they have.
Ultimately, the success of a rescue will come down to the skill and experience of the insolvency practitioner appointed. Choose the right person and they will be able to save a business — so long as there’s a viable business there.