Can You Have Your Cake & Eat It?

The Body Shop is another case of corporate insolvencies continuing at a pace but do we all really know what a company insolvency means to us and our businesses.

When dealing with insolvencies of companies there are two main types of insolvency – Administration and Liquidation.

The simplest way to explain the difference is that:

• Liquidation is not good,
• Administration is better but still not great.

Lets look at an example

The Body Shop – They entered Administration in February of this year.

This means that a third party will take over the running of the company, usually an Insolvency Practitioner (IP) or an Accountant with a view to finding a buyer for the company as a whole, or continuing to run it as a going concern.

Deals are often made with the creditors of the business. They’ll offer people who are owed money say 40p in every £ owed, to reduce the liabilities of the business and to make it a more attractive proposition to buyers.

For the established high street names Administration is the preferred option, so that the company can continue to run. The brand name continues and there is a possibility that some, if not most of the staff can keep their jobs.

Is there such a thing as a successful Administration ?

One such example of a ‘successful’ administration is HMV.

• A high street name needing support to find a buyer and retain goodwill rather than close.
• Administration was the preferred option.
• Thankfully a buyer was found for HMV and the majority of the stores stayed open, safeguarding numerous jobs.

What if there wasn’t a buyer ?

If a buyer could not be found, or the company is found not to be a viable option for continued trade, as in the case of Carillion and most recently Wilko, then the company may enter Liquidation.

But what is Liquidation ?

This is where a Liquidator or IP will affect a ‘fire sale’ of the company’s best assets such as:

• stock,
• order book,
• machinery
• plant

Monies raised are to pay its creditors. However, because the company has closed and the brand no longer trades, there is no future revenue and the staff will unfortunately lose their jobs.

In Summary

Should you suffer the pain of having a company enter insolvency, then your best hope for a positive outcome is if it goes into administration. In which case you should always lodge your claim with the IP, as there is a chance that you could get paid a creditor’s dividend, or some pence in the pound against what you’re owed.

If the outcome is liquidation, again lodge your claim with the IP but be aware that any dividend will only come about from the sale of assets and this is solely in the hands of the IP. So no guarantees, no timescales and less chance of a positive outcome.

Remember,  there are ways and means of limiting your exposure to the risk and pain of bad debts and insolvencies. If you would like to discuss these options, please feel free to as well as reading more of