Administrators and redundancy – is it about to get messy?

Blog | Corporate Restructuring & Insolvency

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The long running case of R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013 has sent ripples of concern through the insolvency industry, when it confirmed that (in theory at least) administrators can be prosecuted for a failure to follow redundancy procedures prescribed by sec. 194 Trade Union and Labour Relation (Consolidation) Act 199 (TULCRA). Insolvency practitioners across the country are now anxiously awaiting the outcome of the court proceedings which could place them in an insidious conflict between their duty to act in the best interests of creditors and ensuring they do not put themselves at risk of criminal prosecution.

The background to the case

West Coast Capital (USC) Limited (USC) was placed into administration by its director on 13 January 2015, when Mr Palmer was appointed as one of the administrators (two others were also appointed, but the division of responsibilities meant that only Mr Palmer was subject to proceedings).

On the same date, a pre-pack sale of the business occurred, which expressly excluded a warehouse. The following day, the employees of the warehouse (84) were notified by Mr Palmer that they were at risk of redundancy and that a consultation meeting would be held later that day. Around a quarter of an hour later, they were handed a letter advising them that following the consultation USC could not identify any alternative to redundancy and they were dismissed.

On 30 January 2015, the Redundancy Payments Service asked the administrators whether a form HR1 had been lodged. The form HR1 was lodged by the administrators on 4 February 2015, who explained that it was filed late due to an oversight. In July 2015, the Secretary of State (SoS) issued proceedings against Mr Palmer (and the director) for failure to follow redundancy procedures under sec. 194 TULRCA and, specifically failure to lodge form HR1 with the Redundancy Payments Service in the required timeframe.

Under sec. 193(2) of TULRCA an employer proposing to make 20 or more employees at one establishment redundant within a period of 90 days or less must notify the SoS of their proposal before giving notice to terminate a relevant employee’s contract of employment, and do so at least 30 days before the first of those dismissals takes effect.

Sec. 194 of TULRCA states that an employer who fails to do so commits an offence and is liable on summary conviction to a fine. Where such an offence is committed by a corporate body and is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or another similar officer of the body corporate, or any person purporting to act in any such capacity, they as well as the body corporate is guilty of the offence and liable.

The outcome

The Magistrates’ Court found that Mr Palmer (as administrator) could be prosecuted for offences under sec. 194 TULRCA. Mr Palmer sought a judicial review of that decision to ascertain whether it was in theory possible to prosecute an administrator under sec. 194, and this case is the outcome of that judicial review.

Mr Palmer argued that:

  • He was not a “director, manager, secretary or another similar officer” of the company and therefore fell outside the remit of sec. 194

  • An obligation on an administrator to give 30 days’ notice of the proposed redundancies could have serious ramifications for the administration process and place the administrator in an untenable position of conflict. It would mean they have an obligation to retain employees for a minimum of 30 days to avoid criminal prosecution whilst also being under a duty to act in the best interests of the creditors - which may require the immediate termination of employment.

  • Waiting more than 14 days before terminating the employment contracts would mean that the company adopts the contracts and elevates employee claims to preferential status.

What now for administrators?

The court on judicial review held that administrators are capable of being prosecuted under sec. 194. From the date they are appointed, only they are in a position to notify the Redundancy Payment Service as they are carrying out a managerial function in place of the directors. The issue of whether this makes administrations untenable is a matter for Parliament. The case will now proceed in the Magistrates’ Court to determine whether Mr Palmer committed a criminal offence.

The decision places administrators in an insidious conflict between their duty to act in the best interests of the creditors and ensuring they do not put themselves at risk of criminal prosecution. To date, there have been no successful prosecutions of administrators under sec. 194. The Magistrate decision is now anxiously awaited.

Pending the outcome of the Magistrates case, our advice to administrators where there is even a possibility of more than 20 redundancies taking is to carefully consider (pre-appointment) whether retention of employees is tenable or not and, if it is, determine whether the purpose of the administration can be achieved if employees must be retained for 30 days post-administration, and/or if redundancies are likely, review the steps taken by the directors to ascertain if the correct documents have been lodged within the required timescales. Subsequent to an appointment we’d suggest you assess the employee position and immediately file the relevant form HR1 with the Redundancy Payment Service if 20 or more redundancies are likely.

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Business survival at the best of times is challenging but how you react to the current crisis, and what actions you take now, can help avoid an insolvency situation. Our experts provide advisory, transactional and litigation services in relation to all restructuring and insolvency matters. We are by side when times are tough

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Rising energy prices force Bulb to enter Special Administration

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Bulb appoints a special administrator

Energy supplier Bulb has announced they are going into special administration, as the energy crisis looks set to continue. For their 1.7 million customers, it comes as unsurprising news as wholesale gas prices continue to rise. 

The appointment of a special administrator will be a first for Ofgem, who have been able to deal with previous insolvent suppliers through the appointment of a Supplier of Last Resort (“SoLR”). Bulb is too large for the SoLR process and so Ofgem have had to resort to the special administration process. 

Our energy specialist Tim Speed said: 

“The appointment of an energy administrator is a drastic step for Ofgem and is another indicator as to the extent that the energy market is struggling.  

What is a Supplier of Last Resort?

“A Supplier of Last Resort (SoLR), which involves another company taking over supply to the failed supplier’s customers, is the default action for the majority of collapsed energy companies. However, the size of Bulb means this isn’t viable. Although the process has existed for some time, an energy supply company administration has never been implemented before, showing how dire the current situation is. The aim is to ensure supplies are continued at the lowest possible cost, with the administrator able to split up the existing business by transferring all or part of it to other companies, when appropriate. 

“Other energy suppliers that are concerned about their future must act quickly. By identifying the problem and seeking professional advice early on, it may be possible to secure an investment or sale that guarantees a future for the business. However, this does take time, so it’s important to address any issues while there is still sufficient cashflow. 

“Ofgem and the Government need to make serious decisions about the future running of the market, because the events of recent months cannot be repeated.” 

Bulb speak out on rising energy costs

From a statement on their official blog, Bulb say “When we founded Bulb in 2015 it was because we thought energy customers deserved a better deal. We believed strongly that we should do things differently, and that by building a talented team and creating our own technology we could make energy simpler, cheaper and greener.”

“Wholesale prices have skyrocketed and continue to be extremely volatile. The gas supply shortage combined with lower exports from Russia and increased demand means they remain high and unpredictable. Prices have hit close to £4.00 per therm recently, compared with 50p per therm a year ago”

Are you a struggling energy supplier?

We have acted for insolvent suppliers who have been able to sell their assets to other suppliers.  We have also acted for suppliers who have entered the SoLR process.  

If you are an energy supplier or are advising an energy supplier we would be more than happy to talk to you in order to discuss available options. 

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Our 50+ energy and water team is made up of lawyers from multiple disciplines across the firm, all of whom act for clients active, or with an interest, in the sectors. These include our specialists in utility regulation and industry codes, as well as experts across real estate, corporate finance, commercial contracts, retail and consumer debt, litigation and, uniquely for a law firm, our in house planning consultants.

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What are the options for the consolidation of special purpose vehicles (SPV’s) for a university?

Guides and Advice

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Special Purpose Vehicles and consolidation

When it comes to corporate restructuring and insolvency, there are various options for universities wanting to consolidate.

Many universities will have incorporated separate companies to carry out certain operations, such as the provision of catering supplies or nursery services, with many operating profitably and providing a service to students, staff, and the local community.

Similar special purpose vehicles (SPVs) may also have been set up to deal with a particular piece of research work or to work alongside external bodies in a joint venture arrangement.

Some of these SPVs may be lying dormant after a research project or specific initiative has fulfilled its objective or come to a close. Keeping these companies on the books can increase administration costs for accounts and compliance teams unnecessarily, or the SPV could be sitting on valuable cash or assets that could be reinvested into new projects.

Taking the time to tidy up the corporate structure of a university can have many benefits and there are three options;

  • strike the company off from Companies House
  • a members’ voluntary liquidation
  • creditors’ voluntary liquidation.

Strike off

If a company has been inactive for at a period of least three months and satisfies certain other criteria, it can simply be removed from the register of companies and dissolved by a simple application accompanied by a small fee payable directly to Companies House.

This procedure is quick and inexpensive but may not be the right option, particularly if the company in question has outstanding liabilities to third party creditors.

Any application to strike off must be given to all creditors of the company and will also be advertised in the London Gazette. As a result, any creditor could object to the striking off process.

If the company has valuable assets, striking off is not advisable either as any assets will vest in the Crown bona vacantia following the dissolution. Striking off will not, therefore, benefit shareholders where assets remain within the company or creditors if the company has significant liabilities.

If the company has a combination of both assets and liabilities, the more appropriate route is likely to be a formal insolvency process led by an insolvency practitioner as liquidator.

There are two alternative routes for a voluntary liquidation process. Both are initiated by the directors of the company (as opposed to compulsory liquidation, which is commenced with a winding up petition).

Members’ voluntary liquidation (MVL)

A members’ voluntary liquidation (MVL) is a “solvent liquidation”. It can only take place if the directors of the company are able to swear a statutory declaration of solvency whereby they must confirm that all liabilities of the company (including employee claims, debts to suppliers, HMRC, or joint venture partners), together with interest if applicable, will be paid off within 12 months of the declaration of solvency.

An MVL may help simplify corporate structures or have the advantage of allowing a tax efficient distribution of assets as part of a reorganisation process. Once any creditors’ claims have been settled, any surplus in terms of assets can be distributed by the liquidator to the university or individual shareholders and at the end of the liquidation process, the company will be dissolved.

Directors must exercise caution when swearing a declaration of solvency as making a false declaration can lead to criminal proceedings against the director(s).

Creditors’ voluntary liquidation (CVL)

If the directors are aware the company is not able to pay its liabilities from the realisation of its available assets, it is effectively insolvent and the process to place the company into creditors’ voluntary liquidation should be followed.

This is a procedure where the company’s creditors have an active involvement, including the choice of the liquidator and participation in decisions regarding the liquidator’s remuneration and strategy.

How can we help?

We are able to advise you on the most appropriate route in any restructuring exercise and can provide you with the relevant legal advice covering real estate, corporate and taxation issues that frequently arise.

We work regularly with the leading insolvency practitioners with expertise in the sector and can assist you in making the right choice of the most suitable liquidator, dovetailing with them to ensure any corporate reorganisation is ultimately successful.

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Working with higher and further education institutions, independent providers, academies, and schools, our full-service team can advise on any legal issue that an education institution may have. This includes regulatory and policy work, employment issues,  student matters, governance and constitutional questions, partnerships and collaboration, disputes, large-scale capital projects, and estates master planning.

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High Court highlights the risks of drawings in lieu of salary

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The high court has held that companies cannot write off a directors loan arising from drawings in lieu of salary just before liquidation to minimise a director’s liability on insolvency.

The court rejected arguments that the loan was salary paid in advance of future dividends, and upheld the idea that where companies do not have sufficient profits, but in any event choose to pay dividends, owner-directors will be liable to repay them on liquidation.

What was the case about (in headline summary)?

Ms Buchanan was the sole director of Bronia Buchanan Associates Limited (the Company).  She received a minimal PAYE salary, but she received significantly larger payments in the form of drawings in lieu of salary (resulting in a directors loan showing in the company accounts).  The Company ceased trading on 22 September 2014 and entered into insolvent liquidation.  In the lead up to liquidation the Company reclassified the ‘directors loans’ showing in its accounts as drawings

The liquidators called upon Ms Buchanan to repay her directors loan, explaining that the reclassification of the loan to Ms Buchanan as “drawings” in the company’s accounts was ineffective to release her from liability to repay it.  Ms Buchanan argued that the drawings received should have been recorded as salary, and as such she was entitled to the money drawn, and stated that her professional advisers had informed her that ‘financially matters were fine’.  She argued that the loan had been reclassified as drawings the months before liquidation (on the alleged advice of insolvency practitioners) and therefore she was not liable to repay it.

The court rejected Ms Buchanan’s arguments.  It decided that, despite her insistence that the amount owed was always payable to her as “drawings,” the sum remained as a debt owed to the Company by her.  It therefore fell to be repaid upon liquidation.  The attempt of a company, in the final days of its life to write-off a large debt to a connected person was found not to have any effect in law.  Had this had been allowed by the court, every owner-director may attempt it in their companies’ final days.

Practical Takeaways

This decision reinforces the position that once a shareholder director elects to be remunerated via drawings in lieu of salary, the drawings payments made to them cannot later be reclassification as having been salary on a ‘quantum meruit’ if there are in sufficient profits to declare a dividend.  If a company does not have sufficient profits to declare a dividend to offset those drawings the director will be liable to repay the sums on insolvency.

While this is often seen as the most tax preferable way for a shareholder director to remunerate themselves, it comes with risks.  Directors need to balance those risks against the benefits.  This analysis will be brought into sharp focus as we exit the COVID-19 pandemic and the restrictions on the ability of creditors to take action against companies are lifted.

Shareholder directors should always take competent professional advice and consider the full implications before remunerating themselves vis this method.

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Frank is recognised as an expert in restructuring and insolvency law, and one who provides decisive practical solutions.

Frank specialise in providing managed solutions in financially distressed scenarios to assist OMBs, companies, directors, lenders, investors and other stakeholders, as well as insolvency office holders.

Corporate Restructuring & Insolvency

Business survival at the best of times is challenging but how you react to the current crisis, and what actions you take now, can help avoid an insolvency situation. Our experts provide advisory, transactional and litigation services in relation to all restructuring and insolvency matters. We are by side when times are tough

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John Lewis Partnership to cut jobs in management restructure

On 14th July, the John Lewis Partnership announced that it would be cutting up to 1,000 jobs across its John Lewis and Waitrose stores in a bid to streamline management structures.

The news follows the earlier decision to close a number of stores across the UK as part of its 5-year Partnership plan, which aims to reduce business costs by £300 million per year by 2022.

The effects of the pandemic

There is no denying that the pandemic was, and continues to be, a catalyst for drastically altering shopper habits and many flagship brands are reacting accordingly.

The John Lewis Partnership’s decision to simplify management structures, focus on customer service and invest in its existing store portfolio is more evidence of this. Whilst this might be welcome relief for their finances, it is unfortunate news for the individuals affected.

A shift to ecommerce

Even before the pandemic, shopping behaviour was changing, with many people preferring to shop online. Over the last year this became a necessity, accelerating the trend and causing retailers to have to react quickly, shifting their attention towards ecommerce. John Lewis was no different.

While there’s been no mention of further store closures this time around, with a greater focus on ecommerce it’s clear that this is something the Partnership presumably cannot rule out as they advance their shift from bricks-and-mortar retail to online.

Faced with redundancies

Despite the positive spin that this latest restructuring will allow “reinvestment for customers”, including investing more in ecommerce and customer service, it is likely to mean the John Lewis Partnership now has a potentially tricky redundancy process on its hands.

These redundancies should be handled with care and the correct due diligence, to avoid any disputes or difficulties later down the line. This being said, John Lewis is expected to offer support to its staff, by helping them find new employment elsewhere in the business.

Get in touch to find out how our restructuring and insolvency and employment teams can help.

We have launchedourguide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found onourdedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. VisitSHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director's responsibilities, insolvency, restructuring,fundingand disputes.

We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call0800 689 4064.

 

 

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Your summer guide to recovery and resilience in COVID-19

Your updated summer guide to recovery and resilience

As the UK takes its first steps to ease the current national restrictions and looks forward to an increase in economic activity and recovery it is vital that businesses are prepared in every aspect.

To support businesses and people navigate their way out of the last year and the current national restrictions, unlock their potential and drive for a brighter future, we have updated our guide to recovery and resilience.

From financial considerations, employees, leadership and premises, to supply chain implications, health and safety and protecting your private wealth, our guide highlights what organisations and individuals should consider when moving from survival to recovery to thrive.

Financial considerations

Whether a large corporate with a highly structured board, an SME or an owner-managed business, the financial viability of a business is key to its future success.   However, as the thoughts turn to the roadmap out of lockdown once again, and what the future may look like, businesses that have got through the last year should consider a range of measures to enable them to cope with what is likely be a recession for some industry sectors of the UK. Prudent business owners will be well aware of the predictions and while there will be a bounce back it may take some time for confidence and stability to return from customers and suppliers.

Your employees

Managing a workforce of any size can have its challenges, let alone one that is recovering from a global crisis. Many businesses will have furloughed employees or made the difficult decision to make a number of their workforce redundant. For those businesses that haven’t, it’s highly likely they will still face having to make difficult choices, albeit further down the line.

The knock-on effects of the COVID-19 outbreak have changed the way employers engage with and effectively manage, their employees. The processes, policies and guidelines that worked previously may no longer be fit for purpose for your business, or for your workforce, in the new working landscape. With the rollout of the COVID vaccine facilitating the gradual return of employees back into the physical workplace, this in itself will bring a host of new opportunities and challenges.

Buildings, workspaces and leases

As the world and economy move forward out of lockdown, owners and investors of real estate as well as occupying tenants will have to consider the adjustments they now need to make whilst the restrictions around social distancing continue.
They will need to find new ways of working and inevitably different ways to use their space over the coming months and, at the same time, consider how to manage the cost of premises in these changed circumstances.

Suppliers and supply chain

Many businesses have struggled to comply with their contractual obligations as a result of the COVID-19 pandemic and may have been forced to rethink their supply chains. A focus in recent years on minimising costs, reducing inventories and maximising asset utilisation has often resulted in a reduced ability to cope with disruption. Whilst the impact of the COVID-19 pandemic is unprecedented in modern times, disruption to the global economy is an increasing risk, whether due to political events such as Brexit, US-China trade tensions, or climate change.

Private wealth, family businesses and family

The effects of COVID-19 will undoubtedly have a huge impact on our economy for years to come, with many businesses collapsing under the strain and the level of unemployment set to rise significantly. However, what is less widely reported on is the effect it is having and will continue to have, on families and personal wealth. We’ve already seen that the pandemic has led to an increase in people looking at how they may pass on their wealth to the next generation –and even more so for those that own family businesses.

Compliance – Health and safety

Employers have clear duties under existing health and safety legislation. Obligations to comply with health and safety at work, and to manage and control workplace risks, includes protecting workers and others from the risk of COVID-19 infection in the workplace. That duty is to do everything “reasonably practicable” to manage these risks. The onus of demonstrating that everything reasonably practicable has been done falls to the employer. The best way to demonstrate compliance with the law is usually to follow government and industry-led guidance wherever possible.

Leadership

Strong leadership is a cocktail of authenticity, collaboration, passion, compassion, and a great deal of bravery. We all know the best results occur when we are pushed out of our comfort zones and the ingredients are shaken up, and COVID-19 has done exactly that. With government guidance signalling the UK’s route out of current national restrictions, the time for positive leadership is now. It’s time to take control of what we can and create an environment with enough certainty where people can feel safe enough to flourish centre stage.

We are here to help

The team here at Shakespeare Martineau remain committed to supporting our clients and our communities throughout these challenging times, with

the depth of experience, collaborative ethos and the creative know-how to lead positively to the future.  We are able to offer advice and solutions on a range of subjects for life and business - from employment and general business matters, through to director’s responsibilities, insolvency, restructuring, funding and disputes to issues affecting family businesses, personal wealth planning and family law. Do contact us on 03300 240 333

 

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Managing the risk of insolvency in your supply chain

The increased risk of insolvency

The combined impact of Covid-19 and Brexit means that there are significant financial pressures on companies across the construction industry. As a result, these pressures are likely to lead to an uptick in the number of insolvencies.  Of course, government have put in place measures to assist many companies, including furlough and business loans, but when those measures come to an end the wage bill and loan repayments still need paying.

Add into the melting pot an increase in the cost of materials and labour, and a decrease in productivity over the last 12 to18 months, and arguably what you have is not far off a perfect storm against the backdrop of which further insolvencies in the supply chain are inevitable.

 

Why is this relevant for housebuilders? 

Knowing that there is an increased risk of insolvency means that it is more important than ever for housebuilders to manage and monitor their supply chain.

Monitoring the supply chain can avoid or, at the very least, highlight risks early on enabling housebuilders to take appropriate mitigation measures.  Such measures usually involve keeping the channels of communication open and engaging in early discussions. The aim is to look to agree any workable solution which preserves the housebuilder’s position.

 

How do you know if a company is in financial trouble?

There are a number of warning signs of financial distress to look out for – we’ve produced a checklist of the key signs, below.

Payment-related signs:
  • A sub-contractor not paying its own workers or suppliers.
  • Requests for release of retention when retention is not yet due.
  • Requests for advance payment.
  • Premature applications for payment.
  • Contra-charge claims being made without foundation, to inflate the sums applied for.
  • Inflated applications for payment generally.
Changes in conduct:
  • Underbidding at tender stage, for example, to secure work should raise questions over the underlying reason for low tenders. If it looks too good to be true, it probably is!
  • Radio silence i.e. failures to respond to calls or emails.
  • More aggressive communications, such as the threat of proceedings if payment is not made.
Site-based changes:
  • Suspension of works on site without justification.
  • Reduction in the level of resources on site, for example:
    • A reduced number of staff/workers and/or sub-sub-contractors not turning up without explanation; and/or
    • A reduction in the amount of materials being delivered to site or indeed sub-contractors removing materials or plant equipment from site prematurely before the works are complete.
  • Unexplained or unjustified delays in completing the works by the contractual completion date.
  • A decline in the quality of the works and any associated increase in the number of defects.
Other signs:
  • It is worth keeping an ear to the ground in relation to the ‘unofficial grape vine’. It can often be a case of ‘no smoke without fire’ and it is worth listening to workers / other trades on site as they sometimes have an inside track on what may be happening, which merits further due diligence.
  • Becoming aware of any programme of redundancies or restructuring.
  • Last but not least, late filing of accounts or unsatisfied court judgments can both be clear signs of financial issues.

It is important to ensure that all your key staff (including site staff and those in the commercial and accountancy teams) are aware of what the warning signs are and, subsequently, the need to flag any concerns they have identified as soon as possible.

 

The options for managing and mitigating risks

Generally, there is no right or wrong approach.  However, keeping the channels of communication open often leads to the best outcomes.  Being upfront about whatever a workable solution could be is certainly a good first port of call, such as:

  • Increasing the frequency of payments to improve the sub-contactor’s cash flow to assist them in completing the works; or
  • Omitting elements of the works. However, you need to be careful here as any agreement should be documented so as to ensure that there is no ‘sting in the tail’ (i.e. the sub-contractor seeking to claim for loss of profit on the omitted works).

Can a sub-contract be terminated in the event of insolvency?

Ultimately, in the event of formal insolvency or failure to carry out the works, exercising the right to terminate the sub-contract might be the best option. However, there are a number of considerations before terminating.

Most housebuilders engage their sub-contract supply chain on standard sub-contracts (whether on an individual or framework basis). Therefore the first thing to check is whether the sub-contractor is actually “insolvent” as defined in the sub-contract.

If you terminate when the sub-contractor is not insolvent, as defined in the sub-contract, you can end up in a sticky situation, as this can of itself constitute a repudiatory (serious) breach of contract.

If there is no formal insolvency within the meaning of the sub-contract, it will be necessary to look carefully at the terms of the sub-contract to check if there are any other grounds on which to terminate.

Grounds for termination of sub-contracts

Contractual grounds for termination often include matters such as delay, poor workmanship or even a deterioration in the sub-contractor’s financial standing.

In our experience, sub-contracts will often include a ‘termination at will’ provision.  This means that the housebuilder can terminate the sub-contractor’s employment, even if there is no basis on which to do so.  This can be a useful tool, particularly, where the sub-contractor has not yet entered into any formal insolvency arrangement/process.

However, that said, it is worth being aware that termination at will provisions can (and often do) give rise to arguments about whether there is compensation payable to the sub-contractor as a result of depriving them of the benefit of the sub-contract, namely the carrying out of the sub-contract works for payment. As a result, it can be preferable either to look to reach an agreement to close out the sub-contractor’s involvement, or wait for the formal insolvency to occur to avoid any potential dispute on this front.

Getting termination right

In the event that you do decide to terminate the sub-contract, it is crucial that you follow any requirements in that sub-contract.  For example, such provisions might include requirements as to the form and content of the notice and / or the means by which the notice is to be served.  Strict compliance is necessary, as getting it wrong can mean place you in repudiatory (serious) breach.

We know from experience that, on occasion, sub-contractors are engaged without any formal sub-contract being put in place.  Looking to terminate in this situation is a little trickier, as it might be necessary to have regard to the common law (general) right to terminate the sub-contract.  In conclusion, it will be necessary to be able to establish a repudiatory (serious breach) of the sub-contract.  This is a breach so fundamental in nature it entitles the innocent party to bring the sub-contract to an end.

Often the position can be quite nuanced and, as such, it is worth seeking legal advice around whether a sub-contractor’s apparent breach of the terms of the sub-contract is sufficiently serious to give rise to a common law (general) right to terminate.

Keep a record of evidence

Along the way, it is important that detailed records are maintained, not only recording and evidencing the breaches on the part of the sub-contractor but also any losses arising out of those breaches.

 

Communication is key

Developing and maintaining trusted relationships with your sub-contract supply chain will go a long way to keeping an even keel. However, it isn’t always possible to avoid the risk of insolvency in the supply chain altogether. The key is to keep a close eye on any tell-tale signs and manage the risks which arise as early as possible.

 

We’re here to support you

We regularly act for housebuilders in assisting them in managing insolvency and/or disputes that arise in the sub-contract supply chain.

Read more about how we can help you manage construction disputes effectively.

If you’re concerned about the risk of insolvency in your supply chain then our specialist construction law team can guide you through your options – contact Kate Onions for advice and support.

Our construction team is ranked as a Leading Firm in the Legal 500 2021 edition.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

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Blog

What are the true costs of redundancy?

As a result of government financial support gradually starting to wind down, including the furlough scheme, many employers will be beginning to feel concerned about the future impacts of COVID-19. For some, restructuring workforces and streamlining teams may be required, and in the worst cases, making roles redundant will be one option to save money in the longer term.

Although a difficult decision for employers, it can sometimes be the most effective solution, especially when work levels are down. However, redundancy does come with its own costs. We highlight the key points to consider when faced with those difficult decisions.

The direct costs of redundancies

The price of redundancy will vary depending on individual circumstances, with scale being a major factor. Here are the main direct costs surrounding the process:

  • Statutory redundancy pay: Statutory redundancy pay will only be available to employees with at least two years’ service and will usually equate to between 1 to 1.5 week’s pay (depending on age) for each full year worked.
  • Enhanced redundancy pay: Not all employers offer enhanced redundancy, however, for those that do this will obviously increase overall costs, particularly if those made redundant have longer service. Don’t forget that enhanced redundancy entitlements can carry over from previous jobs under TUPE, so employers need to profile who they are dismissing.
  • Notice pay: Longer serving employees will have longer statutory notice periods, up to 12 weeks. This means that the cost savings will only start showing at a later date. Alternatively, businesses may choose to pay in lieu of notice, bringing forward savings but requiring a significantly larger initial pay out.

From 6 April the weekly cap on pay for statutory redundancy purposes has increased.

Considerations of redundancy

Businesses also need to consider the indirect and less tangible costs that can arise, such as:

  • A dip in productivity: As the redundancy process can be time consuming, with managers having to hold meetings with every individual who has been placed at risk of redundancy, there may be a dip in general productivity. Even those not being made redundant will likely feel the impact, which could potentially making them less motivated and result in poorer productivity.
  • Legal ramifications: With good legal counsel, businesses can ensure they are undertaking a fair redundancy process. However, this does not prevent ex-employees from bringing unfair dismissal claims. Defending these claims will impact the company productivity, morale and comes with substantial associated costs. Making enhanced redundancy terms conditional upon employees signing settlement agreements is a good way of mitigating these risks, but will obviously only apply to those employers prepared to offer enhanced pay.
Alternatives to redundancy

As an alternative to redundancy, businesses can look at restructuring alternatives that don’t rely on reducing headcount, for example:

  • Reduce workforce related costs: Reducing wages is difficult but possible in extreme circumstances. Stopping discretionary bonuses and withdrawing discretionary benefits are less risky alternatives.
  • Evaluate the space requirements: Consider whether property portfolios are still suitable now that agile working practices are becoming more common.
  • Review financial arrangements: Assess whether more beneficial rates are available in the market.
  • Releasing financial assets: Look into whether assets, such as stock and machinery, are an option for cash generation.

Find out more about alternatives to redundancy in our free webinar, available to download now.

Reducing the workforce can cost more than expected. Reassessing the company’s property portfolio or rethinking other overheads can help businesses to avoid redundancies. However, if a redundancy programme does go ahead, business owners and HR managers must ensure they do what is required by law, treating employees fairly and with compassion.

We’re here to support you

If you have concerns or queries on the implications of making redundancies then speak to a member of our employment team for guidance and support.

Our corporate restructuring and insolvency team can also work with you to identify areas of business stress and distress as early as possible, and help you develop and put in place a successful corporate restructuring and turnaround strategy.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.  

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

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Guides & Advice

The Corporate Insolvency and Governance Act 2020

UPDATED: 25 March 2021 – The government has given businesses more breathing space by further extending measures from the Corporate Insolvency and Governance Act.

A number of measures introduced in the Corporate Insolvency and Governance Act to protect businesses from insolvency, which were due to expire on 31 March 2021. However, the following have now been extended once again:

  • Statutory demands and winding-up petitions will continue to be restricted until 30 June 2021 to protect companies from aggressive creditor enforcement action.
  • Termination clauses are still prohibited, stopping suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process. However, small suppliers will remain exempted from the obligation to supply until 30 June 2021.
  • The modifications to the new moratorium procedure will also be extended until 30 September 2021. A company may enter into a moratorium if they have been subject to an insolvency procedure in the previous 12 months. Measures will also ease access for companies subject to a winding-up petition.
  • Business owners affected by the pandemic will be protected from eviction until the end of June 2021.

The above extended measures follow on from The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (SI 2020/1349). This came into force on 26 November 2020 - renewing the suspension of wrongful trading liability for directors to 30 June 2021. 

 

What is the Corporate Insolvency and Governance Act 2020?

The Corporate Insolvency and Governance Act 2020 received royal assent and came into force on 26 June 2020.

Central to this new legislation is a new moratorium, which will give a company in financial distress a 20-business day breathing space from creditor enforcement action. This can be extended for up to a year with the consent of creditors.

A full copy of the guidance can be found here.

This new moratorium gives protection to businesses that may be financially struggling, and may result in the rescue of the company as a going concern. The moratorium is intended to be a “light touch procedure” and is overseen by a monitor who must be a licensed insolvency practitioner.

 

What impact could the moratorium have on the business world?

The new moratorium gives protection to businesses from creditors and may save viable businesses that are struggling financially.

Saving viable businesses that are struggling could achieve a better result for the company’s creditors as a whole, than would be likely if the company were wound up (without first being subject to a moratorium).

 

What action can’t be taken against a company in moratorium?

Legal and enforcement action against a company in moratorium is extremely restricted. Without permission of the court:

  • a landlord cannot forfeit a lease or re-enter property;
  • no steps can be taken by a creditor to enforce security;
  • HP creditors cannot repossess goods;
  • legal processes for debt recovery cannot proceed (except employment claims); and
  • floating charge holders cannot crystallise their charges.

Supplying goods and services to a company in moratorium

When a company enters an insolvency or restructuring procedure, suppliers of goods and services will often either stop, or threaten to stop, supplying the company. The supply contract often gives them the right to do this, but it can jeopardise attempts to rescue the business. Suppliers will no longer be able to use contractual terms to jeopardise a rescue in this way.

Any goods or services supplied in the moratorium period should be paid for, and will be a priority debt to be paid, if the company in moratorium fails.

 

The role of the monitor

A monitor must be a licensed insolvency practitioner and can only consent to take office as monitor if a company can demonstrate that the moratorium will result in the survival of the company as a going concern.

They are required to bring the moratorium to an end as soon as it becomes clear that this purpose cannot be achieved.

 

The responsibilities of directors

Key offences have been introduced in relation to the duties of directors (including shadow directors) of companies that enter into a moratorium. They must supply information on request to the monitor (to satisfy the test that survival as a going concern can be achieved) and the monitor must submit a report on the conduct of the directors as part of this process.

Directors will commit an offence of fraud in anticipation of a moratorium if they:

  • conceal assets with a value over £500;
  • conceal debt due of over £500;
  • fraudulently remove assets to the value of £500 and above; or
  • make false representations to the monitor to secure consent for them to act.

What are the key provisions that secured lenders should be aware of and the impact on qualifying floating charge holders (QFCH)?

Lack of control over the process

A moratorium can be entered into by simply filing documents at court. There is no requirement to obtain consent (or even notify) a qualifying floating charge holder (QFCH), or other secured lender, ahead of entering the moratorium. A QFCH will be notified of the moratorium by the appointed insolvency practitioner (the “monitor”), alongside other creditors, once the moratorium is already in force. Therefore, unlike in an administration, a QFCH will not be able to “veto” the directors’ choice of insolvency practitioner.

The moratorium lasts for 20 business days and can be extended for a further 20 business days by the directors - and for up to 12 months with creditor (or court) consent. However, the required creditor consent for these purposes is from creditors whose debts fall outside of the moratorium. As set out below, debt arising from loan agreements and other finance documents still needs to be paid during the moratorium. Lenders would therefore be unlikely to form part of the voting class of creditors, and would not be able to vote down any requests for an extension for up to 12 months.

Lenders must still get paid

A company subject to a moratorium is given breathing space from “pre-moratorium debts” that have fallen, due from which the company has a “payment holiday” (whether due before or during the moratorium). This catches, amongst other things, trade creditors.

However, there are certain debts that the company must pay during the moratorium and failure to do so may cause the monitor to terminate the moratorium (and/or prevent the directors from seeking an extension of the moratorium). This includes debts and other liabilities arising under a contract or other instrument involving financial services. This means that the usual capital and interest payments due to lenders will still be payable (unless otherwise agreed with the lender).

Enforcement restrictions

Although lenders’ debts will still need to be paid during the moratorium, the restrictions may significantly impact the enforcement options available to QFCHs. Lenders may well wish to factor the following in to their credit and operational procedures to enable them to deal with the risk of a hostile monitor appointment by the company’s directors:

  • The moratorium suspends a QFCH’s ability to crystallise its charge or appoint an administrator;
  • Certain floating charge provisions enhancing a QFCH’s rights may be void (e.g. provisions providing for crystallisation of a floating charge – whether automatic or following notice, and restrictions on the disposal of property ); and
  • Under the moratorium, charge holders are unable to enforce security without the consent of the monitor or the court.
Other security risks

A company cannot dispose of property subject to fixed charge security without court consent. However, directors may apply to the court to dispose of property as if it were not subject to the fixed charge. There are provisions providing fixed charge holders with compensation for their loss of rights (effectively reimbursing the lender for what the court thinks the property would be worth in the open market). However, this effectively enables a restructuring package to ignore the security. This could result in fixed charge holders being put at a significant disadvantage, with a loss of rights (particularly in a potentially depressed market).

For floating charge assets, a company can either:

  1. deal with assets in accordance with the terms of the floating charge instrument; or
  2. obtain consent of the court to deal with the assets in another way.

As the floating charge cannot be crystallised, floating charge assets can usually be disposed of in the ordinary course of business (which we expect would be in accordance with the terms of the floating charge instrument), potentially materially depleting the assets available to a lender ahead of any post-moratorium enforcement. Once assets have been sold, lenders will have a floating charge over the proceeds of sale, but usually will not be directly entitled to the proceeds (and cannot enforce the charge to obtain payment).

Disposing of assets

Lenders should therefore review the terms of their security and facility to consider whether the restrictions and controls provide adequate protection. In particular, how and when companies can dispose of assets and fine tuning the definition of a disposal of assets in the “ordinary course of business” (e.g. should consent be required for a bulk stock sale). Whilst such controls are not ordinarily as important, the inability to crystallise a floating charge, or otherwise enforce security during a moratorium, may mean that restrictions need to be tighter to retain some control and dialogue with companies in the event of a moratorium (whilst still enabling the company to trade effectively).

Finally, lenders should also be comfortable that fixed charge security will withstand scrutiny and is not vulnerable to challenge as a floating charge. The risk of fixed charge assets being treated as floating charge assets could be substantial, as the assets could be sold without court consent and the proceeds of sale (and other compensation) would not be required to be paid to the lender. Lenders should therefore audit their charges and ensure that appropriate levels of control are exerted over fixed charge assets. For example, if taking a charge over plant and machinery, ensuring it is properly scheduled to the debenture and valuable items are plated. Similarly, if a lender intends to create a fixed charge over debts (as opposed to an assignment), they will need to ensure that the receipts are paid into a blocked account and other appropriate controls are both in place, and enforced.

 

What options are open to lenders?

Although a QFCH cannot appoint an administrator during the moratorium, the moratorium will automatically terminate upon directors filing a notice of intention to appoint administrators. At that point, the QFCH would be able to exercise its powers as usual and regain control of the appointment process by appointing its own nominated insolvency practitioner as administrator, if it was not comfortable with the directors’ choice.

The directors will not be able to extend the moratorium unless they confirm that all debts that have fallen due in the moratorium, or pre-moratorium debts that are not caught by the payment holiday (i.e. potentially bank debt), have been paid. In addition, the monitor must bring the moratorium to an end if they are of the view that it is no longer likely that the company can be rescued as a going concern.

Bringing the moratorium to an end

Entering into a moratorium, will in many cases, constitute an event of default that will automatically accelerate the entire debt. Even in those cases where acceleration is not automatic, it may be open to lenders to issue a notice accelerating their debt to make it payable on demand during the moratorium period and thus regain some control given the company is unlikely to be able to pay. If the entire debt is accelerated it becomes due and payable during the moratorium period. As a consequences, if the company cannot pay (which is likely to be in all cases) the monitor will either have to bring the moratorium to an end (as they would unlikely be able to continue to believe that the company could be rescued as a going concern) or the company will have to negotiate with the lender to agree a stay.

If a stay cannot be agreed, then acceleration could enable the lender to re-take control of the process via an administration appointment or other enforcement process once the monitor (as they will have to) terminates the moratorium.

Further if the debt is accelerated and becomes payable during the moratorium, the lender would also be in a better position in the event of a subsequent insolvency (see below).

We would expect that a moratorium would usually be an event of default triggering automatic acceleration of a loan.

Payment holidays and deferrals

In relation to any requests by borrowers for payment holidays, waivers or deferrals of covenants, lenders should consider making those waivers or deferrals void in the event that the company files for a moratorium without the consent of the lender. This would then avoid a position where the lender is prevented from accelerating their debt during the moratorium period as a result of a pre-moratorium waiver/deferral.

Other options

In addition, the following options seem to remain open to lenders:

  • The Act also introduces ipso facto provisions preventing termination of contracts upon insolvency. However, financial services providers are generally exempt from these restrictions. Therefore lenders could cancel non-committed facilities (e.g. overdraft and invoice discounting) and may also be able to rely on provisions in the facilities to, for example, charge default interest or impose an independent bank review (which would be payable as moratorium expenses);
  • Lenders may be able to obtain additional security for additional lending (subject to obtaining the monitor’s consent); and
  • Lenders can challenge the conduct of the directors or the monitor at court, which may result in the reversal of detrimental decisions.

How will lenders’ debts be ranked in a subsequent insolvency?

The Act makes consequential amendments to existing insolvency legislation to alter the priority of distributions, where a company enters into administration or liquidation within 12 weeks of the moratorium ending. The amendments rank moratorium debts and pre-moratorium debts that should have been paid during the moratorium (i.e. bank debt) ahead of preferential creditors (and ahead of paragraph 99 expenses and floating charge distributions in an administration). The amendments do not provide for the ranking within this class, instead making provision for changes to be made to the Insolvency Rules to govern the priority within this category.

In the meantime, the Act introduces temporary provisions that provide for the order of priority for debts payable under the moratorium to be paid in a subsequent administration or liquidation. Lenders’ debt would rank ahead of the monitor’s remuneration and expenses, but behind suppliers who are covered by the “ipso facto” provisions and employment-related costs. This would appear to be a significant disincentive for secured lenders to continue to support the company and provide working capital funding during the moratorium.

In addition:

  • CVA proposals submitted within 12 weeks of the moratorium ending cannot provide for debts payable during the moratorium to be paid otherwise than in full; and
  • any restructuring plan applied for within 12 weeks of the moratorium ending, cannot compromise moratorium expenses (or pre-moratorium debts without a payment holiday) without first obtaining consent of each of these creditors.

We’re here to support you

For further information, guidance and support on how the Act can help relieve the financial burden during the current COVID-19 outbreak, and allow you to focus your efforts on continuing to survive and operate, do not hesitate to contact a member of our corporate, insolvency and restructuring team.

Alternatively, you can get in touch online or visit our corporate restructuring and insolvency solicitors page to learn more.

Our insolvency team is ranked as a Leading Firm in the Legal 500 2021 edition.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.  

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

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Guides & Advice

New law to scrutinise pre-pack sales in administration

UPDATED 24 March - Further to its announcement on 8 October 2020, the government has now published its updated pre-pack reform legislation for independent scrutiny of pre-pack administration sales. This is where connected parties, such as previous directors, shareholders or associates, are involved in the purchase. The new legislation, which will come into force on 30 April 2021, aims to improve the transparency of pre-pack sales in administration.

What is a pre-pack sale?

A pre-pack administration sale is a procedure where an insolvent business reaches an agreement to sell its assets to a buyer before appointing administrators to facilitate the sale of the business. This could be a trade buyer, existing directors or a third party.

Pre-pack sales are often arranged between the company and persons connected with the company, such as previous directors. This raises concerns for creditors as they are only informed after the event, which allows them little or no input into the sale.

The Graham Review

An independent review into pre-pack sales took place in 2014 – known as the Graham Review. Following the publication of the Graham Review, a number of voluntary industry measures were introduced in 2015 to address the core issues identified.

The Graham Review concluded that although pre-pack administration sales often helped to preserve jobs, and were a vital tool for rescuing businesses, there were issues around the lack of transparency in the process. This was particularly for unsecured creditors who were excluded, and so felt any deal made was not in their best interest.

As a result of the Graham Review, measures were introduced. This included the establishment of a group of experienced business professionals, known as the Pre-Pack Pool, to offer an opinion on marketing principles. Viability statement and independent valuations or the proposed connected-party pre-packaged sale were also introduced. However, referral to the Pre-Pack Pool remained at the discretion of the purchaser.

In addition, amendments were made to the Statement of Insolvency Practice 16 (SIP 16), which sets out regulatory guidance on how insolvency practitioners should handle pre-pack sales. The aim was to reduce the concerns of lack of transparency by requiring administrators to provide creditors with information about the marketing of the business. Any alternatives to the pre-pack sale were then considered.

The government’s pre-pack sales in administration report

On 8 October 2020, the government published its report on the findings and recommendations of the independent review of the voluntary industry reforms to pre-pack sales in administration, that were introduced in 2015. Although improvements were introduced by the Graham Review, the government considered further reforms were required regarding the transparency of pre-pack sales and to improve creditor confidence. The report was accompanied by a set of draft regulations to increase independent scrutiny of pre-pack sales in administration to connected parties.

Proposed regulations

On 24 February 2021, the draft statutory instrument of the regulations was published following a period of consultation. The regulations were debated in the House of Commons and the House of Lords and were approved on 23 March 2021. They will come into effect from 30 April 2021.

The new regulations will apply where there is a ‘substantial disposal’ in administration of the company’s assets.

We provide a summary of the regulatory framework below.

Independent qualifying report
  • An administrator will be unable to make ‘substantial disposal’ of property of a company to a person connected with the company within the first eight weeks of the administration, without either the approval of creditors or an independent qualifying report produced by an evaluator.
  • The connected party purchaser will be required to obtain the qualifying report and provide a copy to the administrator.
  • A connected party purchaser may obtain more than one qualifying report.
  • Where a qualifying report states that the case is not made for the support of the substantial disposal, an administrator can still proceed with the substantial disposal. However, they will be required to provide a statement setting out the reasons for doing so.
  • The provider of the independent qualifying report (the evaluator) must be independent of the connected party purchaser, the company and the administrator.
  • The administrator must send to every creditor of the company, other than opted-out creditors, a copy of the report. If more than one report was received, then they must send all the reports.
Statement of proposals
  • The report(s) must be sent with the statement of proposals (required to be sent to Companies House and to creditors under paragraph 49(4) of Schedule B1 of Insolvency Act 1986).
  • If the administrator seeks creditor approval, rather than a qualifying report being obtained, the administrator will need to seek a decision of the company’s creditors when issuing their proposals, referred to in paragraph 49 of Schedule B1. The creditors are required to approve the administrator’s proposals without modification, or with modification to which the administrator consents.
Provider of qualifying report

The provider of the qualifying report meets the requirements as to qualification. The individual needs to be satisfied that their relevant knowledge and experience is sufficient for the purpose of making a qualifying report:

  • They have professional indemnity insurance;
  • They are independent (i.e. not a connected person); and
  • They are not excluded from acting as an evaluator.

The evaluator must state in their qualifying report that they have considered any previous qualifying reports obtained. This is to avoid connected parties ‘opinion shopping’ for a qualifying report they prefer.

Do the regulations address previous concerns?

While the draft regulations stipulate the criteria which an evaluator must meet in order to produce a qualifying report, which include being independent and insured, the regulations do not require the evaluator to have any specific professional qualifications. The evaluator simply needs to be satisfied that their ‘relevant knowledge and experience’ is sufficient for the purpose of making a qualifying report.

The new regulations will apply where there is a ‘substantial disposal’ in administration of the company’s assets. The term ‘substantial disposal’ has not been defined within the regulations. The reasoning for this is that what amounts to a ‘substantial disposal’ may vary depending on the size of the relevant business. It is also a term that is used in other insolvency legislation and insolvency practitioners are therefore familiar with it.

One concern was that it should be the administrator that should obtain the independent qualifying report, as they have technical experience which may assist the evaluator. However, it remains that the qualifying report is to be obtained by the connected party purchaser rather than the administrator.

What does this mean for the future of pre-pack administration sales?

In the current uncertain times, company insolvencies are likely to increase once the government’s support under the Corporate Insolvency and Governance Act 2020 expires. As a result, this will likely lead to a rise in the use of pre-pack sales and it is therefore inevitable that they will be subject to more public scrutiny than usual. This is particularly due to the costs of the government support packages which will have kept such businesses afloat during 2020.

The requirement for an independent written opinion, or creditor approval to be obtained before a pre-pack administration sale, can be made to a connected person. This, in theory, adds a layer of protection for creditors and should improve confidence in the pre-pack process. Pre-pack sales can then be effectively used by insolvency practitioners to obtain a successful sale which, in turn, should protect both businesses and jobs.

As obtaining creditor approval could be a long and uncertain process, particularly for a company that has many creditors, it is likely that the independent written opinion will be used in the majority of pre-pack sales. Whilst obtaining an opinion does not guarantee that the report will agree with the substantial disposal, and an administrator will still be entitled to proceed with the proposed transaction as long as a statement for his reasons for doing so is provided, it may be a quicker and more convenient course of action than creditor approval.

We’re here to support you

While pre-pack sales do sometimes (rightly) get bad press, it shouldn't be forgotten that they can also be a valuable tool for maximising value to creditors. In distressed situations, often the only buyer in town is a connected party, as the lack of time to undertake meaningful due diligence rules out other buyers.

It remains to be seen how successful the regulations will be at increasing creditor confidence in the pre-pack sale process once they come into effect on 30 April 2021.

For further information, guidance and support on how these changes may impact an existing or planned pre-pack administration process, do not hesitate to contact a member of our corporate, insolvency and restructuring team.

Our insolvency and corporate recovery team is ranked as a Leading Firm in the Legal 500 2021 edition.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.  

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

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Blog

What do ASOS and Boohoo’s recent acquisitions mean for UK retail?

As retailers fall under increasing pressure due to shifting behaviours and COVID-19 restrictions, the high street continues to feel the impact, with major names disappearing one by one.

Following the collapse of Arcadia last November, ASOS bought the prized Arcadia Topshop, Topman and Miss Selfridge brands, as well as athleisure brand HIIT, for £330 million earlier this month.

Now that online-retailer Boohoo has scooped up Debenhams and the remnants of Arcadia’s brands (Dorothy Perkins, Wallis and Burton) for £25.2 million, what does this mean for the future of UK retail?

What's next for the physical stores?

Empty stores present an opportunity for junior brands to grow. No landlord wants an empty property, so these brands are now better positioned to begin negotiations and set up shop, possibly securing good deals on retail premises.

Individual buildings could also change from commercial to residential use, thanks to relaxations in the planning system. These retail spaces could become an alternative for affordable housing in inner-city locations.

How will this impact high streets?

It may be time to totally rethink high streets across the country. Turning commercial properties into residential homes has plenty of advocates, and while there is still hope that consumer behaviour will return to pre-COVID levels eventually, the bottom line is that the high street may look very different post-lockdown.

Our blog on the role landlords can play in the future of the high street looks at how the improvement of landlord-tenant relationships can provide a light at the end of the tunnel.

What about those losing their jobs?

The fate of these stores’ employees is yet to be decided, with no guarantees for jobs to be transferred. While some employees may be diverted into online sales, there are still thousands of roles at stake.

If redundancies happen, it’s vital that the correct processes are followed. Employees must be told what payments they will receive regarding notice entitlement, holiday pay, and statutory redundancy pay (where an employee has two or more years' service.)

How will it change these high street names?

ASOS and Boohoo clearly see the value that the Debenhams and Arcadia brands hold and will be keen to expose customers to a new purchasing experience. Online retail is taking the spotlight, and younger audiences are a crucial market that these classic names could now be opened up to more successfully.

The pandemic has unsurprisingly altered our shopping habits, with online retail increasing exponentially. However, this trend was already taking hold even before COVID-19. As such, the time has come to increase innovation and look for new operating models, to avoid further stress.

We’re by your side when things get tough

If your business is experiencing financial difficulties, and you’re concerned about the future, then speak to a member of your local corporate, restructuring and insolvency team.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director's responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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Guides & Advice

Commercial tenant CVAs | What landlords need to know

With England starting 2021 in another national lockdown, and many businesses forced to close their doors once again, it’s likely there will be an increase in businesses entering Company Voluntary Arrangements (CVAs).

What is a CVA?

A company voluntary arrangement (CVA) provides a framework for a debtor company to reach a binding settlement with its creditors for pre-arrangement debts, often at a figure less than their full value.

The impact of CVAs for commercial landlords

The restrictions introduced as a result of COVID-19 have further highlighted the problems landlords have been facing. This is particularly true for those in the retail sector, with many of the usual remedies for recovering rent from their commercial tenants now restricted:

  • An evictions ban on commercial tenants for non-payment of rent is currently in place until 30 June 2021.
  • There is currently a stay on possession proceedings. Although now expired, this means landlords have to file and a reactivation notice confirming they wish to have the case in question listed, relisted, heard or referred.
  • There are limitations on commercial rent arrears recovery, depending on the length of time for which rent has been unpaid.
  • The presentation of statutory demands and winding-up petitions, save in certain carefully designated circumstances, is currently prohibited.
What are the options if a commercial tenant enters a CVA?

Many might consider that the above restrictions have created a charter for tenants to avoid their contractual obligations. However, where struggling businesses are building up significant rent arrears, their landlords have some important recovery options still available to them.

1. Recovery from former tenants and their guarantors, or from existing guarantors or potentially sub-tenants.

If the tenant entered a lease agreement before 1996 its landlord may be able to pursue the original / previous tenants for breaches. However, if the lease was granted on or after 1 January 1996 there are restrictions. For example, there must be an authorised guarantee agreement (AGA) in place with the previous tenant and, even then, that route can only be pursued for certain types of claim.

In addition, only the immediately preceding tenant can be pursued (not the original tenant). It is therefore worth checking carefully for the availability of former tenants and also current guarantors (e.g. parent company / director guarantees).

2. Landlords may hold a deposit

In addition to holding a deposit, subject to the contractual wording of this deposit, landlords may also be able to draw down funds or consider revisiting any other security the tenant may have provided.

3. Court proceedings

As debt claims are not prohibited, landlords can still bring proceedings in the country courts or High Court in order to recover any rent arrears. Furthermore, while statutory demands are currently restricted for use against businesses, they are not restricted for individuals or sole traders, meaning an enforcement option still remains.

While there is understandable sympathy for business that are struggling during this difficult times, the British Property Federation has made it clear that landlords are businesses too. The pension funds of millions of individuals are invested in the commercial property sector alone. Therefore it’s essential that all parties work together.

The government has published a code of practice for the commercial property sector to encourage commercial tenants and landlords to work together.

This is in addition to the RICS Commercial Rental Independent Evaluation Service, which offers support with fair and structured negotiations, helping to avoid issues ending up in court.

The Corporate Insolvency and Governance Act 2020

Rent is only one obligation that struggling businesses have – they are also likely to owe sums to suppliers, employees and HMRC. When businesses reach this level of financial difficulty they will likely seek restructuring options, with one options being the moratorium procedure introduced by the Corporate Insolvency and Governance Act 2020.

This gives viable businesses who are currently struggling some protection from court or other enforcement action, offering a period of time to reorganise their operations or seek reinvestment. It is a short-term option where existing management stays in place, but are overseen by a qualified insolvency practitioner who acts as monitor.

It remains to be seen whether this is an effective solution for struggling businesses, many of whom are currently being supported by financial relief from the chancellor in the form of the furlough scheme and financial support.

The moratorium only suspends a landlord’s rights of action for a limited time - it does not affect the general obligations of the tenant under a lease. However, these obligations may be varied by other restructuring options available, such as a CVA.

CVAs - making arrangements

Like the new moratorium, a CVA also leaves the debtor company under the control of its directors, with the arrangement managed by an insolvency practitioner.

With certain CVAs involving substantial property portfolios, the only creditors adversely affected by the scheme of arrangement are landlords and local authorities. All other creditors paid in full. This ensures that the CVA receives the necessary majority of 75% of creditors voting for approval.

Under a CVA, a landlord may be forced to receive a reduction in the contractual rent payable under leases and closures of unprofitable stores. The only recourse available to the landlord is to assert in the courts that the CVA contains a material irregularity, or unfairly prejudices their interests as a creditor.

In the widely reported Debenhams case Discovery (Northampton) Ltd & Ors v Debenhams Retail Ltd & Ors [2019] EWHC 2441, the court decided that treating landlords differently to trade suppliers does not amount to unfair prejudice. As a result, they may be justified by carrying out a balancing exercise to determine the overall fairness of the CVA proposal.

However, the judgment did reassure landlords that a CVA cannot restrict the right of a landlord to forfeit a lease.

To minimise the risk of a vacant property, in certain circumstances, a landlord may wish to consider a turnover-based rent agreement. This takes into account the uncertain nature of future trading. This may also be favoured by the tenant as it may give them the flexibility it needs to survive.

The importance of having a proactive debt recovery strategy

Under a CVA the landlord will often recover a substantial proportion of the rent they are owed under its lease. This is a better outcome to what would be the case if the tenant were to enter liquidation or administration. However, while CVAs may not seem immediately attractive, landlords should consider other potential alternatives too.

Before a tenant enters administration

If there is a risk of tenants entering administration or liquidation, being proactive and issuing letters before taking any legal action and/or court proceedings for the debt should always be the first port of call. It’s also like to work to a landlord’s advantage if the tenant is keen to avoid judgments that may breach its banking covenants or other commercial arrangements.

Following administration or liquidation

If a business is forced into administration or liquidation, a landlord’s claim will now most likely rank alongside other unsecured creditors behind HMRC, after having regained its preferential status in relation to certain tax liabilities with effect from 1 December 2020.

However, if the tenant enters a formal insolvency process, ongoing rent can be demanded as an expense of the administration or liquidation if they remain in occupation of the premises,

As we emerge from the pandemic and more commercial properties face risk of closure and lying vacant, landlords may choose to consider more open dialogue with their tenants, particularly around turnover-based rent agreements, rather than taking the more traditional option of enforcement action.

Contact us

We’re here to help you through these difficult situations and guide you towards a solution - contact Sean Moran in our corporate restructuring and insolvency team, or James Fownes in our commercial property disputes team, for advice and support.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064

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Staying afloat – why communication is key during COVID-19

Staying afloat – why communication is key during COVID-19

A third national lockdown has put further pressure on cash flow and it could take the economy even longer than thought to bounce back.

However, now is not the time for businesses to give up. Directors and owners should be planning how best to face the future, and communication remains a vital part of any survival plan.

Here we explain the top tips on how communication can be used to make it through a third lockdown.

  1. Don’t be afraid to talk

Most businesses are being hit by the same challenges. As a result, there should be a level of mutual understanding between fellow directors, creditors, customers and suppliers.

More than ever, organisations must work together to adapt to this changing environment. Negotiation could be an effective way forward, especially regarding contracts with suppliers, as it can create solutions that benefit all involved.

Of course, negotiations might not always be simple. For example, HMRC can be the most challenging of those stakeholders to a struggling business and any concessions now available in the form of VAT deferral or time to pay will be closely monitored against the risk of potential abuse.

  1. Support other businesses

Communicating with stakeholders could pinpoint competitors that are having difficulties. COVID-19 has impacted every business in different ways, and in turn has created opportunities for support. By having regular meetings with fellow directors, companies can discuss finances and identify any issues that need to be addressed. However, it is essential to document any decisions that are made as a result.

  1. Diversify your client base and products/services

In a recession, it’s inevitable that one or more of a business’ clients will leave – unfortunately, most likely due to financial hardship. As a business’ best source of income is a strong client base, it is crucial to diversify this as much as possible. Therefore, directors and owners should begin talks with other companies to assess whether new client relationships can be created.

Assessing the products and services offered can also lead to new areas of business being identified that are perhaps less vulnerable to recession. This type of diversification, as well as diversifying a client base, can help to soften the blow considerably.

  1. Seek professional guidance

Seeking advice from solicitors, accountants and insolvency practitioners at an early stage is always wise. Advisers can help to assess business decisions, recognise the warning signs of insolvency, and recommend solutions to any financial difficulties, including signposting the resources available. If appropriate, advisers can also assist with negotiations around payment holidays with key suppliers.

Looking to the future

COVID-19 has the potential to cause long-lasting damage to supply chains and businesses, with economic recovery likely to be slow. To regain some stability in this uncertain time, organisations must communicate with all key individuals effectively, to ensure support can be given and received where possible.

For guidance and advice around the solutions available if you’re experiencing financial difficulties, contact a member of our insolvency and restructuring team.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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Guides & Advice

The return of Crown Preference

Earlier this year, the Insolvency Act 1986 (HMRC Debts: Priority on Insolvency) Regulations 2020 (SI 2020/983) (the “Regulations”) were published coming into force on 1 December 2020. The regulations will restore the Crown Preference in insolvency proceedings, despite arguments that it’s a step backwards preventing potentially viable businesses being rescued and negatively impacting floating charge holders and unsecured creditors.

Why was Crown Preference abolished?

Crown Preference was an established principle in insolvency proceedings for many years, until 2003. Its abolition was designed to improve the survival prospects for companies by increasing the use of business rescue procedures. Its preferential status meant HMRC was regularly petitioning to wind up companies to reclaim the monies owed to them; companies that could often have been rescued if another insolvency procedure had been used. Removal of Crown Preference was aimed at levelling the field of play and bringing it in line with other creditors.

Why is Crown Preference being reintroduced?

The main purpose of the reinstatement of HMRC as a preferential creditor is to ensure that a larger proportion of the taxes paid by employees and customers can be recovered to fund public services, rather than be distributed to other creditors, such as banks.

The effect of the changes

From 1 December 2020, HMRC will become a secondary preferential creditor in insolvency procedures meaning it will rank above floating charge holders and unsecured creditors; further reducing the typically already small pot left for such creditors.

The following will be included in HMRC’s preference:

  • Pay As You Earn Tax (PAYE);
  • Value Added Tax (VAT);
  • Construction Industry Scheme deductions (CIS);
  • Employee National Insurance contributions (NIC); and
  • Student loan repayments.

HMRC will remain an unsecured creditor for direct taxes such as Corporation Tax and Employer NICs.

The order of priority in insolvency proceedings will remain the same but rather than preferential creditors only being employees entitled to arrears of wages up to a maximum of £800, holiday pay and pension contributions arising in the four months prior to insolvency, it will now also include HMRC to an uncapped amount.

  1. Fixed charge (secured) creditors
  2. Costs of the insolvency process
  3. Preferential creditors
  4. Floating charge creditors
  5. Unsecured creditors
  6. Shareholders

There is however a significant change to the remit of HMRC in these proceeding.  Previously, HMRC was only entitled to preferential status for tax debts less than 12 months old. Under the new regulations, any tax debt will now have preferential status, regardless of how old it is. This open ended timescale has the potential to vastly increase the amount HMRC could recover in a liquidation of a business which will in turn, further reduce the returns for unsecured and floating charge creditors.

How will this impact businesses?

HMRC is usually one of an insolvent company’s biggest unsecured creditor, typically due to directors prioritising payments to critical creditors, such as trade suppliers, over tax payments. From December, with its preferential status likely to act as an incentive to wind up companies rather than enter into lengthy negotiations with a company in an attempt to agree a repayment plan, directors are now more likely to have HMRC at the forefront of their minds. If a troubled company tries to continue meetings its obligations to HMRC and all of its other creditors, it's unlikely to continue trading for long without some form of rescue process, such as a CVA or administration being implemented.

If a company is experiencing any financial difficulties, directors are urged to seek professional advice sooner rather than later, and before HMRC arrears spiral out of control.

As floating charge holders are likely to have their returns significantly impacted, finance providers may become more risk averse and hesitate to lend large sums of money with only a floating charge for security. Banks and other financial institutions will likely seek additional security in the form of personal guarantees from directors. As this would result in a personal liability, directors are again more likely to prioritise paying HMRC as and when their payments fall due.

The change, however, may have a bigger impact on smaller businesses as they are less likely to have substantial assets for a lender to take fixed security over. As lenders will be more cautious when providing finance for a floating charge, smaller companies may find themselves unable to obtain the necessary funding. This would be a blow to companies in normal times but with so many businesses suffering due to COVID-19, and cash being more important than ever, the reintroduction of Crown Preference is likely to hinder the recovery of businesses that would otherwise have been viable.

Whilst HMRC expects to receive millions by its return to preferential status, which would then go into the public purse, it is unlikely that the benefit of this will outweigh the harm to companies, floating charge holders, unsecured creditors and the economy as a whole.

For further information, guidance and support on how these changes may impact you as a creditor in a potential liquidation, do not hesitate to contact a member of our corporate, insolvency and restructuring team.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

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Guides & Advice

10 practical tips for directors in litigation

Litigation is always stressful; for many directors it is a rare event that distracts from their real jobs and consumes resources.

One of the critical stages during litigation is the disclosure process, which is where the two sides go through their own documents and prepare the evidence that will be relied upon at trial. This can be a demanding process for everyone involved.

In partnership with Jasper van Dooren of KLDiscovery, litigation specialist Max Rossiter considers key points that directors need to be aware of when dealing with disclosure.

1. Do you know where your data is held?

We all access a wide variety of data sources on a daily basis - we send and receive emails, make phone calls and join colleagues for virtual meetings. All this information is available at your fingertips, regardless of where in the country you log in from, however, having continuous access to your files does not automatically mean they are stored locally on your device. Knowing the location - are your emails stored locally on a server at your office or in the cloud hosted on the other side of the world? - is paramount when asked to search and collect potentially-relevant documents.

2. What type of data do you need for the disclosure process?

For the majority of cases, email data is the predominant source of evidence, but keep in mind that this may change based on the parameters of the case and the relevant time period. Recent years have seen an exponential growth in alternative communication tools used such as WhatsApp, Skype, Teams and Slack. In addition to the communication data, relevant documents can reside in a variety of locations, such as files stored in a shared project folder, phone calls that are recorded, records from financial systems, saved CCTV footage and pictures stored on mobile phones. Do involve your IT department in this conversation, as they might be aware of old systems that are no longer in use.

3. Custodians of your data – who, what, where and how

Before you delve into exploring the different data sources available within your business, you should identify the potentially-relevant individuals (custodians) that might hold relevant material early on in the process. This is an effective way to limit the scope of the disclosure exercise by steering you to, or away from, certain data sources, as most likely the targeted custodians will not have access to all data within your business. It will also prompt the conversation of where the custodians are located and how this may influence the data acquisition, both from a legal and technical perspective.

4. Missing data – the consequences for you and for the opposition

Data will go missing or be deleted during the course of running a business. Given that litigation often occurs years after the relevant events, it is not surprising that certain documents might not be available. However, expect the other side to make a fuss about this if the data that they want is no longer available. Don’t worry – as long as the documents were not deleted while the dispute was on going you are likely in the clear. The courts recognise that the disclosure process is meant to be proportionate - just make sure you have a clear understanding of which documents have been deleted and why.

5. How are you planning to access your data?

Being able to access your data from anywhere in the world is unfortunately not the same as collecting your data in a defensible manner, a requirement for disclosure. The first step is to find out who manages your data sources identified as potentially relevant. If your company outsources its IT services, we would highly recommend to reach out to this partner as soon as possible. This will give you an understanding of if and how they can help with the collection exercise, and if so, how long this will take. Many IT companies do a great job keeping the infrastructure up and running, but they might not have the resources to collect the information quickly, as is often required during litigation. Alternatively, if IT is managed in-house, include your head of IT as soon as possible in conversations, as they will be a valuable asset during the early conversations while you prepare for disclosure.

6. Sensitive documents and how to handle them

Sometimes, especially in cases where dishonesty is alleged, the other side might request that you search through the personal data of your employees, which could involve searching their text messages or personal emails to see if they contain information that is relevant to your case. In general it is a good idea to deal with these conversations head on and give your employee the chance to explain anything that could be found on their personal devices, or to decline the search. It is important to involve your solicitors or in-house counsel in this process as well in case there are any employment issues that could arise, such as the employee feeling worried that your solicitors might access their bank details or personal photos. Often a short conversation between the employee and your solicitors will reassure them that the solicitors have no interest in reviewing those documents, and will not share anything irrelevant with their employer.

7. Disclosure – a moving target

Unfortunately, disclosure is not a linear process. A lot of thought is put into the approach during the outset of each matter, but new facts, issues or documents can be uncovered during the process that requires the initial approach to be amended. In general it is suggested to collect data with a relatively wide, but proportionate scope. Agreed keywords and date ranges will be applied at the next stage to filter down this larger set before review commences. The main benefit of this approach is that if the scope of the disclosure changes for whatever reason, you can simply amend the filtered criteria, rather than recollecting data and putting an unnecessary burden on your business.

8. Key disclosure documents and what to expect

The way in which disclosure is dealt with in the English courts has recently changed. As a result, a senior team member in your business will have to be responsible for liaising with your solicitors to access the documents required and to guide the disclosure process. This individual will be required to sign a certificate setting out what searches were undertaken and the limitations/changes to the searches that had not been initially considered, as well as how the parameters might have changed over the course of the disclosure process. You should identify this person quickly and ensure they have the necessary time and authority to deal with third party providers and internal business units to get the documents they might need.

9. Remote working

With the Covid-19 pandemic more people are now working remotely, away from their usual office. This can be problematic for numerous reasons – key documents might only be available at the office, and key people that understand a business’ systems are may no longer be physically available. However, our experience has shown that with careful planning, remote working is not a problem - as long as people are adequately prepared. Key business units and individuals should be made aware that the disclosure process is ongoing and that they might get a phone call by the solicitors asking for help with certain documents. It might also be worthwhile at the start of the process to introduce the junior team members who will be actually carrying out the searches to the junior solicitors who will be reviewing the documents. This way they know who they can speak to quickly if they need something specific.

10. Wildcards and how to deal with the unexpected

Litigation is unpredictable, and the disclosure process especially can throw up wildcards, as it is often the first time the parties have had a deep dive through the documents surrounding the case. The key thing to remember is that while this process might be new to you, the solicitors you have instructed have likely dealt with these issues before. It is therefore best to deal with things quickly and decisively and keep your lawyers informed. This will enable them to best guide the process and also ensure that the disclosure is carried out in accordance with the law. It was never intended, and nor is it, a perfect process, and the courts and case law recognise this.

We can guide you through the litigation process

We understand how daunting the disclosure process can seem. Our team of specialist dispute resolution lawyers provide clear and pragmatic advice at every stage; keeping our clients’ commercial objectives in mind and helping them to make the right decisions for their business.

If you’re in the middle of litigation, or about to start the disclosure process, we can help. Contact a member of our commercial disputes team to discuss the best course of action to secure a positive outcome for your business, as quickly and cost-efficiently as possible.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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Guides & Advice

Keeping on top of your business’ finances during COVID-19

COVID-19 has put many businesses in a difficult financial situation.

Although the Government recognised this by pushing the Corporate Insolvency and Governance Act 2020 through Parliament to try and stem the inevitable wave of insolvencies, directors and owners cannot afford to take their eyes off the ball for a second.

The sooner businesses look into refinancing and restructuring, the better, protecting both themselves and their creditors.

Here we explain how businesses can keep their finances in check during the current challenging period.

1. Review your finances

Understanding the financial health of a business is now more important than ever. By regularly monitoring and updating financial records, accounts and cash flow, companies can identify when and if insolvency is on the horizon.

With the UK heading for a double dip recession, cash flow will be stretched considerably. However, cash flow is vital to survival, so organisations should ensure they have enough money to make it to the other side of a slow business period.

Following cash flow forecasting, financial support should be secured from shareholders, customers, suppliers, creditors, lenders, landlords and the Government.

2. Chase up your debtors

During a recession, businesses often pay more slowly while asking clients to pay more quickly, leading to somewhat of a cash flow lag.

To ensure finances remain stable – at least to some extent – as more companies experience financial hardship, directors should prioritise chasing debtors. This way, they can make sure they are paid before their debtors find themselves in trouble.

3. Be smart with credit terms

During a period of uncertainty, clients may ask to extend the usual 30-day terms to 40, 50 or 60 days. However, before offering more time to pay, businesses should check the client’s credit reports. Extended terms should only be offered to reliable customers with good credit.

4. Restructure the business

If a business is consistently trading at a loss, there is likely something wrong on a structural level. For those experiencing this issue, it will be a huge challenge to trade out of an insolvent position.

An insolvency expert can guide businesses towards the most effective survival route, whether that’s debt rescheduling, a debt for equity swap, a transfer to a Newco, a refinancing or an equity injection.

5. Focus on recovery and resilience

Insolvency is something every business would like to avoid, but to do so during a recession can be hard. Recovery will be slow, and each sector will emerge from the pandemic differently. As a result, businesses must stay on top of their financial situation and be open to change if needed.

Contact us

If you’re experiencing financial difficulties and would like some advice and support, then speak to a member of our insolvency and restructuring team.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

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Guides & Advice

Marston’s job cuts: last orders for hospitality?

Marston’s announcement that it is set to cut up to 2,150 jobs has shown that even industry giants aren’t safe from the new Government restrictions.

Coping with restrictions

With the 10pm curfew already having impacted the profits of many businesses in hospitality, the new tier system was always going to hit the sector hard, causing a host of new limitations for pubs, bars and restaurants to contend with.

Confusion caused by this system will likely only exacerbate hardships faced by hospitality venues, with the uncertainty surrounding when things will return to normal making it a challenge to plan for the months ahead.

Will localised support bring some relief?

Although the new localised furlough scheme provides some relief for hospitality and leisure businesses that are forced to close, job cuts are still being made, showing just how close to the edge many pubs, bars and restaurants are.

For those which are able to stay open, and teetering on the brink, redundancies may be the only way forward if they are to survive, with some in hospitality stating they’d be better off if they were made to close temporarily, allowing them to take advantage of the job retention scheme.

How can the hospitality move forward during COVID-19?

The constant balancing act that the sector has had to battle in recent months has drained many businesses, and sector leaders are likely to try and challenge these increased restrictions. However, in the meantime, they should review their business models, assessing what changes can be made and what help is available.

By making the most of Government support and seeking professional guidance regarding the best steps to take next, these latest restrictions don’t have to mean certain death for hospitality.

We’re here to help

If you’re experiencing financial difficulties and would like some advice and support, then speak to a member of our corporate insolvency and restructuring team.

Our guide to recovery and resilience, helps to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

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Guides & Advice

Job Support Scheme: Why a long-term strategy will be key to survival

The Government’s furlough scheme provided a lifeline for many struggling businesses; however, with the end date in sight, it has been forced to introduce further support to mitigate the number of possible redundancies.

The new Job Support Scheme will see the Government and employers share the cost of topping up working hours, requiring employees to work at least one third of their normal hours and be paid for that time by their employer.

Read our comprehensive guide on the Job Support Scheme.

While a lifeline for some, many cash-strapped businesses will be unable to fulfil this in the long run. How can directors take advantage of the additional support out there and protect themselves for the future?

Remember: cash is always king

Businesses should take this opportunity to assess their current position and implement operational changes to preserve cash in the months ahead, including potential restructuring, and supplier and contract negotiations.

Having a clear plan for the coming months could help reduce risk exposure, boost cash flow, and allow companies to take advantage of the new and existing government support that is available.

Poor cash flow and limited cash reserves can be crippling to even the most profitable of businesses, especially in a recession. Therefore, having a good invoicing and collections system is essential to staying on top of any payments coming in.

Read our blog on the importance of keeping the cash flow flowing.

Keep debtors close

When times are tough, it’s common for businesses start paying creditors more slowly, while asking debtors to pay more quickly. Debtors may also ask to change their payment terms, extending the usual 30-day terms to 40, 50 or even 60 days, however, companies should make sure to check credit reports before agreeing to this.

By only offering extended terms to customers with strong credit ratings and who are paying others on time, companies can protect themselves for the future, whilst offering a helping hand to other businesses in the sector that may be experiencing tough times.

Collaboration is key

Understanding the nature of existing and potential businesses relationships is essential when the economy is struggling.

Businesses should concentrate on generating income from those who currently have greater access to funds and should mirror the payment terms of their clients. Having alternative suppliers on standby, if necessary, can prove invaluable to companies working to tight profit margins, and those spinning many plates.

Look further afield

As well as short-term support, businesses should be taking advantage of more permanent measures, too.

The recently-introduced Corporate Insolvency and Governance Act 2020 includes measures such as a 20 business-day moratorium, allowing temporary suspension of the repayment of debts. The new legislation allows businesses more time to restructure or seek financial support without creditors taking immediate action to recover any debts owed.

Supporting businesses in their most challenging times

For companies that anticipate further challenges, being proactive and seeking access to additional support measures, and advice from a professional is wise. They can help weigh-up which support options best suit a business model and provide a long-term survival plan.

If your business is experiencing financial difficulties, and you’re concerned about the future, then speak to a member of your local corporate, restructuring and insolvency team.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

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Guides & Advice

Improving cash collection – every little helps

In a world where cash is king, cash flow is all important to ensuring the survival of any business, which has been bought into even sharper focus now in our new COVID-19 world.  Whether your business is sailing smoothly, treading water or struggling during these tough economic times, having a reliable collection strategy is integral to remaining solvent.

What is a cash collection strategy?

A cash collection strategy is one way to ensure that your accounts receivable (money in) stays under control and you continue to collect your cash and a collection strategy sets a particular standard and a set of processes on how to collect your money from people who owe you money for goods or services.

The problems cash flow can cause

Many businesses do not realise just how much cash is NOT flowing. The key to the future of a business can be tied up in just that process – the gap between money out and money in, and to enable your business to survive you need to make sure that the people who owe you money for goods pay you on time.  Not receiving monies on time for goods and services, means you may well not have the money to pay your bills and staff and is a fundamental requirement for a successful business.

It’s time therefore to review your cash collections strategy.

As a business you can set your own payment terms.  Many small businesses and sole traders submit invoices which are payable on presentation.  Other common terms of business are seven days, 14, 28 or 30 days.  However this means you should have the cash in your account by that date.  This is not the timescale that you should then use to start a collection process to chase cash.

All too often, invoicing and chasing cash is not given the focus it needs and particularly when a business is in trouble, this needs to change and quickly.

Steps to take to improve your cash collection
  • Review your overall invoicing and cash collection strategy and ensure that it is someone’s responsibility within the business to manage this most vital of tasks. Sometimes this job is given to reception staff or office administrators and often it will not be done properly or in a timely manner. Asking people for money is difficult so ensure adequate training is given to enable them to do the job properly and well.  If you have a credit controller this is their job to manage this process proactively.
  • Review your whole process carefully. What is your process?  Is it too long?  Is it fit for purpose?   Make the changes needed.
  • As a business you should not be waiting until a payment is due to start chasing that debt. If you know when your customers set their payment run, call your customer to check that payment is on the next run. This can often be done under the guise of a customer care call – are they happy with the product/service etc.
  • Do not send a statement by mail as the next communication, this will not encourage payment. Send an email invoice reminder.
  • Call the customer and ask when you can expect to receive payment – after all this is your money. If there is an issue with the goods, be prepared to sort this out.  However this should not prevent a customer paying for the goods that are correct, so push for a part payment.
  • Keep calling your customers at regular intervals until you receive payment. Customers will almost certainly divide invoices into urgent and ‘can wait’.  If you keep calling, you keep your invoice top of their list.
  • Develop good relationships with the credit control team at your larger customers.
  • If payment is not forthcoming get in touch with your actual business contact – they may be able to expedite payment as they are not close to the accounts team.

If payment is still not forthcoming do not delay in starting the formal proceedings and contact a debt collection expert. If you work with the correct third party, they will support you in the collection of your debts, without damaging your reputation.

What else can I do to help with cash collection

Review your terms of business.  When many businesses start out it is often the case that the terms of business can be a slight afterthought, often ‘borrowed’ from somewhere else or found on the web. In order for a business to claim all monies due to them, it’s vital to ensure your terms are drafted correctly and includes several very key elements.

An important thing to consider is:

  • Do your terms of business do what you think they do?
  • Do they allow you to recover your goods if your customer becomes insolvent?
  • Do you have an enforceable retention of title clause within your terms of business?
  • Do your terms of business allow you to recover collection costs or claim contractual interest on overdue invoices?

If you are in any doubt we can review your terms of business, ensure they are drafted correctly and review your cash collections strategy ensuring you are in the best position to ensure your cash keep flowing.

Contact us

For further help in developing a cash collection strategy contact Jayne Gardner or another member of the debt recovery team in your local office.

For legal support in relation to the coronavirus or any other matter, get in touch with your team today.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we have lots of educational and entertaining content for life and business visit SHMA® ON DEMAND.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

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Guides & Advice

A New Look at turnover rents

On 15 September, New Look’s CVA proposal was given the green light by its creditors. Not a single store closure is set to take place, with the jobs of the retailer’s 11,000-plus staff safe for now.

Instead, the CVA involves 400 of New Look’s UK stores changing to a turnover-based rent model, the 68 remaining stores having a three-year rent holiday, and enhanced landlord break clauses.

A sign of the times

The approval of the CVA will have come as reassuring news for New Look, however, it further demonstrates the difficulties retailers are facing during the pandemic.

The lack of footfall is hurting the High Street and it is unlikely to get any easier with local lockdowns being put in place at short notice and further national restrictions now on the horizon.

What are turnover rents?

Turnover rents are usually used in leases in the retail sector. The payment is divided into a fixed term base rent, determined by market conditions, and a turnover element, determined by the tenant’s financial performance (the percentages of this division can be negotiated). Turnover rents allow both tenant and landlord to share in the good times and the bad.

Read more about turnover rents.

As a turnover-based rent model takes into account the uncertain nature of future trading, in this case it may give the retailer the flexibility it needs to survive. While it is designed to assist the retailer and will leave landlords with uncertain income, this is clearly better than insolvent tenants and empty buildings.

With a new wave of restrictions looking increasingly likely, this model has the potential to become the sector’s favoured route as the UK moves forward. Although, for such a model to succeed there will need to be close co-operation between retailers and landlords.

Maintaining trust

Retailers that successfully negotiate a turnover rent agreement are then required to keep detailed records of all items sold and must provide their landlord with regular ‘turnover certificates’.

If this isn’t done, the trust between landlord and tenant can be lost and a full audit may be undertaken. However, as long as retailers communicate honestly with landlords, with both parties given a level of security within the agreement, turnover-rents can be a helpful option in uncertain times.

Time will tell as to whether turnover rents will keep New Look trading in the long run, but for now, it has helped to save thousands of jobs, and stopped the country’s high streets from gaining another ghost.

Flexibility is necessary if the retail sector is to survive

To come out of the other side of this pandemic fighting, considerable change is needed. Are turnover rents the solution?

If you’re experiencing financial difficulties and would like some help and advice on how to protect your business, our corporate, restructuring and insolvency team can help – contact Tim Speed for guidance and support.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

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Guides & Advice

Pizza Hut restaurant closures: grabbing a slice of survival

On 11 September, it was announced that Pizza Hut is to close 29 of its 244 UK restaurants, putting around 450 jobs at risk.

After the Eat Out to Help Out scheme ended, Pizza Hut introduced a host of offers intended to support sales. However, this came too late, and wasn’t enough for the chain to avoid store closures.

Challenging times

Pizza Hut has fallen victim to a combination of reduced footfall on the High Street, high rents in unprofitable restaurants, and a failure to adapt to a changing market.

Even before the coronavirus pandemic hit, with footfall in town centres having fallen by five per cent since 2015, casual dining operators have been desperately looking to renegotiate new terms with landlords, including turnover rent and rent holidays.

These, however, have been met with resistance from landlords and for struggling businesses with a number of premises, getting rid of large and expensive high street leases has become key to survival.

Food for thought

Exacerbated by lockdown, the rise of Deliveroo and similar operations has shaken up people’s eating experiences, with many more likely to order takeaways than dine out. While Eat Out to Help Out went some way to provide temporary respite for struggling restaurants, the end of that scheme means that many are now having to re-adjust their strategy for expensive high street rental portfolios.

What’s clear now is that a bricks and mortar presence is far less important to many retail and restaurant business models, and innovation is critical if businesses are to survive on the high street.

Pizza Hut is just the latest in what is already a lengthy list of high-profile post-COVID-19 casualties. In order to avoid the same fate, other businesses in the hospitality sector need to reassess priorities and processes, using this difficult time as a reason to evolve, in turn building future resilience.

We’re here to help

Our webinar on ‘Preserving your business and avoiding insolvency’ focuses on 5 key steps you can take to help your business withstand the effects of the COVID-19 crisis.

If you’re experiencing financial difficulties and would like some help and advice on how to protect your business, our corporate, restructuring and insolvency team can help – contact Sean Moran for guidance and support.

From inspirational SHMA Talks to informative webinars, we have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

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Guides & Advice

The UK officially enters recessions | what does it means for your sector?

The UK officially enters recessions | what does it means for your sector?

On 12 August, the UK officially entered recession after the economy suffered its worst months on record between April and June

Although largely inevitable after the restrictions that lockdown placed on the country, it is still not the news that any sector wanted to hear. So, what could the impacts of the UK’s first recession in 11 years be?

From general business and investment funds to energy and education, our experts provide their thoughts on what the future has in store.

General business

Over the last few months, there has been a considerable rise in the number of insolvencies. The high street was struggling even before the pandemic, with the closure of restaurants and the forced move to online shopping having been the very last things that many businesses needed.

Andrew Taylor, one of our insolvency partners, said:

“The insolvencies and job cuts we’ve seen over recent weeks have been leading up to this point – now an official recession is here and the economy has bitten back with GDP tumbling by a record 20 percent.

“Cue suffocation of cash flow, with businesses paying more slowly while asking their clients to pay quicker. Those that aren’t struggling should make sure they are paid before their debtors run into deeper financial difficulty.

“Where possible, businesses will want to pay their suppliers on 30 to 60-day terms if their clients are doing the same. It’s also wise to have alternative suppliers on standby, just in case they withdraw from the market, become too expensive, or go bust.

“While the horse has indeed bolted, it’s not too late for businesses to plan for what’s to come. Directors must not bury their heads in the sand. The sooner they seek professional advice and act, the more options will be available, and the quicker they can protect their company’s creditors, the business, and most importantly, themselves.

“This is only the start and, while the wider economy will bounce back, only those businesses that have a healthy balance sheet and have adapted to ‘the new normal’ and changes in consumer habits will survive this recession.”

Investment funds

As an increasing number of businesses struggle due to the financial pressure put on them by COVID-19, it has become difficult for investors to know where it is safe to put their money. However, continued investment is vital to the UK surviving this recession.

Kavita Patel, our head of investment funds, said:

“Private investment has played a pivotal role in the UK economy and this will need to continue as we head into a recession and during the recovery as we come out the other side.

“While existing investment portfolios may continue to see further valuation reductions, the normal ups and downs of economic cycles should mean that this will recover if investors can hang on long enough.

“Continuing to support good businesses will help them manage through the crisis and give them the best platform to grow. Whilst it may remain tough for many for some time, history has shown that there are always good investment opportunities in any market. What’s clear is that with interest rates likely to remain low, investment in UK businesses continues to provide an important route for wealth creation which, in turn, will support economic recovery.”

Energy

There are two sides to the coin when it comes to the energy sector during the recession. To meet the country’s climate change goals, the Government must continue to invest in renewable energy, ensuring a level of stability in this area. However, it could be a different story for those in the retail supply sector.

Andrew Whitehead, our head of energy, said:

“The energy sector’s fortunes in many ways are aligned with the Government’s climate change ambitions (and obligations), and it is crucial that spending our way out of recession benefits the green economy, including continued investment and support for energy efficiency, renewable energy and electric vehicle charging infrastructure. This is especially important with the UK hosting the next round of global climate change talks in Glasgow next year.

“Elsewhere, the retail supply sector, already in some turmoil as a result of a combination of price caps and volatile wholesale energy prices, has been struggling to react to the change in consumption patterns and a mandated go slow on household debt recovery. Those suppliers serving industrial and commercial customers have been exposed to the downturn in consumption as shops and factories have closed, and a spate of corporate customer insolvencies looks set to increase in coming months. In such a volatile environment, we can expect to see increased transaction and M&A activity.”

Education

In past recessions, the education sector has benefitted from increased funding, but this may not be the case this time around. Will the UK see a structural change in higher education?

Smita Jamdar, our head of education, said:

“Ordinarily higher and further education are counter-cyclical when it comes to recessions because governments tend to invest in education and training. This government has made it clear that it wants to invest in technical and vocational skills which it sees as key to the levelling-up agenda.

“So far, that has been reflected in lots of warm words and some money for FE, but the investment gap is potentially still huge, especially to compensate for cuts to funding since 2010 and so I hope to see more.

“The Government seems less keen on higher education and there have been numerous alarming comments about too many people going to university and that widening HE participation may no longer be a priority. Universities have been hit hard by COVID-19 and Brexit and it remains to be seen whether securing the future of universities will become a focus for the Government, or whether this is seen as an opportunity to allow some to reduce in size, and possibly merge with other institutions.”

The recent pandemic has proven just how innovative we are as a nation.

The last six months in particular have been difficult for organisations across all sectors, with some industries being affected harder than others.

Recession is never a term that businesses or people want to hear, but the country has recovered before and it will again. Business will continue, even if it has to take a slightly different form.

Contact us

If you need support from any of our sector specialists, don’t hesitate to get in touch.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential and make way for a better and brighter future.

From inspirational SHMA Talks to informative webinars, we also have lots of educational content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

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Clive Read, Partner & Head of Birmingham
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