There is a common misconception that Insolvency Practitioners (IPs) only deal with companies or individuals in a formal insolvency process.

What happens, if you approach an IP because you run a business with good financial controls but it is evident that some parts of your business are loss making, which will eventually impact on its solvency?

Background 

Previously trading from three retail outlets and with an online presence, A Company shut its retail outlets in the March 2020 UK lockdown and once re-opened, were trading at a significant loss.

It was evident from management accounts that if the trend continued, the losses from the retail outlets would in due course utilise all the cash reserves which had been intended to build A Company’s online presence, and eventually lead to the insolvency of the business.

The Director engaged Shaw Gibbs’ IPs to prepare a report, with the crux being an Estimated Outcome Statement (EOS) showing a comparison of the likely outcome for creditors in various scenarios. The report was used to approach the landlords of the retail premises to illustrate that unless the Company was allowed to exit early and use the cash reserves to invest in the online business, the Company would become insolvent in the foreseeable future and all creditors including the landlords, would receive a smaller return.

The EOS compared outcomes between:

• Trading with the shops open
• Reaching an informal agreement with the landlords for payments over time whilst accepting a surrender of the leases
• Company Voluntary Arrangement (CVA)
• Administration
• Liquidation

How did Shaw Gibbs add value?

Shaw Gibbs analysed cash flow forecasts in all scenarios and associated costs, and the report was written to allow the landlords enough transparency into the business to enable them to understand why accepting lease surrenders would be of benefit to all stakeholders. By agreeing to an informal agreement for staged payments, they would in time receive the rent for the balance of the lease.