There is a common mis-conception that Insolvency Practitioners (IPs) should only be contacted by a business or individual facing financial difficulty.

What happens, however, if you approach an IP because you are owed a significant amount of money by a business or individual?

Background

A solicitor got in touch with us to see if we could help one of his clients (Creditor Ltd), a company which was owed a significant sum by a business (Debtor Ltd) and was by far the major creditor. The liability had arisen initially through a loan, and also included a sizeable trade liability since Creditor Ltd was a major supplier to Debtor Ltd.

Shaw Gibbs was engaged by Creditor Ltd to review the overall position and consider the options available. This involved engaging with the director of Debtor Ltd, to assess whether a formal process was required, or if there was an informal way to manage to situation. Creditor Ltd held a debenture over Debtor Ltd, so technically could enforce its position and appoint an Administrator, but wanted to ensure the best decisions were made to enable Debtor Ltd to continue to trade, so that Creditor Ltd could continue as its major supplier and recoup its debt over a period.

Whilst the director of Debtor Ltd was willing to co-operate, since he was aware Creditor Ltd could appoint an Administrator, he had already approached an alternative IP (IP2) from another firm.

Our experience has shown that there will almost always be a better result for creditors when all parties work in harmony, and it was deemed essential that Debtor Ltd did not suffer from any lapse in trade so as not to erode its value. In order to achieve that, our IP knew that we would need the Director to cooperate. He was also likely to be best placed to know parties within the industry who were able to buy the whole or part of Debtor Ltd.

Our approach was to liaise with Creditor Ltd, Debtor Ltd and IP2 to agree the best way forward. Creditor Ltd were keen to keep us engaged, since they had no knowledge of how insolvency processes work and did not have the time to be heavily involved as they had their own business to run. It was agreed that we would therefore effectively act as their spokesperson, representing them as major creditor and charge-holder.

IP2 had already started a business assessment and analysis of options for Debtor Ltd, so it was mutually agreed that this would be finalised as nobody wanted a duplication of fees or work, since this would only act to reduce the return to creditors. Shaw Gibbs would then review the report and decide if the recommendation was appropriate and the best option for the body of creditors.

How did Shaw Gibbs Add Value?

IP2 concluded that a pre-pack Administration was the best option and had instructed their Corporate Finance department to reach out to potentially interested parties, and undertake initial consultations in conjunction with the Director approaching his contacts. All of the above made sense to Shaw Gibbs, however, not long into the process, IP2 advised on a couple of decisions:

• To cease trading one element of the business
• To accept an offer from the third party for the other part of the business

This was where our IP came into her own. A review of the marketing undertaken did not seem to stretch far enough and appeared to have been dictated by the Director, who only wanted to have meetings with the parties that suited him in respect of the potential sale. There seemed to be an element of the tail wagging the dog, and possibly his personal interest being served rather than that of the creditors.

Our IP insisted that additional parties be approached and that, after reviewing critical payments and cashflow, the whole business should remain trading under the control of the director for another short period to allow a more in-depth sale process.

As a result of our insistence the business was sold less than a month later for more than twice the price that IP2 had been prepared to accept. In addition, many more employees retained their jobs and the various landlords were not faced with empty premises. Creditor Ltd achieved a significantly better recovery of its debt and retained its customer, so they were very happy with our involvement.

See our previous case studies:

Revise, Revaluate, Repay

What happens, however, if you approach an IP because you have a personal liability to a bank or another lender?

Review, Reassess, Report

What happens if you are a creditor in an Insolvency process who believes the outcome should be challenged?

Reflect, Refocus, Restructure

What happens if you run a business with good financial controls, but it is evident that some parts of your business are loss making and this will impact on solvency?