Understanding Insolvency and Restructuring: A Comprehensive Guide to Navigating Financial Distress for Businesses
"Any significant incident can trigger an insolvency event – the key to working with these types of companies is open communication; ensuring that your central network of contacts feels able to share news can ensure that the incident doesn’t start a domino effect!"
A Deep Dive into Insolvency and Restructuring with Claire Middlebrook of Middlebrooks Insolvency Practitioners
Claire Middlebrook stands out in the ever-evolving world of insolvency and restructuring with her hands-on experience and unique perspective. Having kick-started her career with Arthur Anderson and eventually launching Middlebrooks, her trajectory speaks volumes about her expertise in the sector. As businesses grapple with financial challenges, Claire’s approach offers a mix of pragmatic solutions and a deep understanding of the landscape. In this discussion, we’ll unpack the latest trends, challenges, and solutions in the insolvency space, drawing from Claire’s extensive experience and the case studies she’s encountered over her career. Join us for a candid and informative conversation.
Claire, thank you for joining us today. Please start by providing an overview of your background in insolvency and restructuring and how you became CEO of Middlebrooks.
I started Middlebrooks in 2015. Previously I had been a partner in a top 50 accounting firm. I wanted to start my own boutique restructuring and insolvency firm that was at the centre of positive futures – and that’s the Vision at the centre of Middlebrooks.
Following university, I immediately entered the accountancy profession in the restructuring team of the then Arther Anderson in Leeds, where I began my training as a Chartered Accountant.
This was an exciting time in restructuring, and we were involved in many global restructurings, from logistics companies to photo printers and everything in between.
The part of my work that I have always enjoyed was speaking to the directors and individuals and helping provide them with a pathway to their own positive future. This generated the Mission of Middlebrooks, to work in a profitable and enjoyable learning team environment, finding a tailored positive future for individuals or companies in times of financial distress.
In 2005 I relocated from Leeds to my home county of Fife and have worked predominantly in the central belt of Scotland ever since. These experiences have allowed me to create a robust professional network up and down the UK and offer solutions across the four home nations.
Middlebrooks Insolvency Practitioners offers a broad range of services, including Company Voluntary Arrangements (CVAs), liquidations, and pre-pack administrations, among others. What trends do you see regarding professional assistance needed, and why do you think this is?
I have now worked in the insolvency and restructuring profession for 22 years, and of late, there is certainly a move towards the use of more formal restructuring processes. I believe that this is due to the more complicated needs of the companies that are coming forwards, but also that there is a greater awareness of what we in the restructuring industry can do.
When companies are facing financial distress, it is often easier to avoid difficult conversations and look to ‘ostrich’. Unfortunately, this then limits options when a process is needed. The current trend of administrations and CVA’s is due to the early intervention of recovery professionals, and in most cases, these cases do provide better outcomes for all stakeholders – including saving jobs.
The other trend currently is the use of CVLs. According to the Insolvency Service, the use of CVL’s (Creditors’ Voluntary Liquidation) in June 2023 was 21% higher than in June 2022. I believe that this trend is directly related to the COVID-19 pandemic and bounce-back loans.
Based on your experience, what are some common signs a business might be heading towards insolvency?
It’s difficult to generalise the signs of impending insolvency as each case can be different.
I have experienced a slow curve into an insolvency event based on declining market share/market conditions and a quick rush, often following a significant incident.
For those companies facing a slow descent, the signs from the outside usually begin with communications slowing down and emails being unanswered when usually the company is communicative. A further sign is being passed between different layers of management with no real resolution, and this often doesn’t need to be solely concerned with money. A general downturn in service standards accompanies the slow descent into an insolvency event – it is likely that management-level staff will also begin to leave.
Any significant incident can trigger an insolvency event – the key to working with these types of companies is open communication; ensuring that your central network of contacts feels able to share news can ensure that the incident doesn’t start a domino effect!
COVID-19 has had a significant impact globally. Specifically in Scotland and, more broadly, the UK, how has the pandemic influenced the rate and nature of insolvencies?
As I mentioned earlier, I am a significant supporter of what the government did during the unprecedented days of the pandemic. Regrettably, I also feel that the can was somewhat kicked down the road.
Prior to the pandemic, low-interest rates and a benign creditor landscape had allowed the much talked of ‘zombie company’ to continue. The pandemic offered a short reprieve for these companies.
Most of the insolvencies we handle within Middlebrooks are those who have suffered at the hands of the pandemic, hospitality, and retail both online and shop front. We treat these people using the legislation under which we operate but also with the Middlebrooks ethos – it’s a difficult time, and we carefully explain all options to the individuals.
That being said, there has been a rise in the number of insolvency cases where there is an element of fraud. Either theft by former directors or misuse of Bounce Back Loans. In those circumstances, we ensure that we can do what we can to gather those funds using the legislation to repatriate funds to the public purse.
What options do businesses have when facing financial difficulties, mainly due to unforeseen circumstances such as the pandemic and, more recently, energy and global commodity prices, particularly as you have experience in agriculture and construction?
Seeking early advice is by far the best way to maximise the best outcome. The key factor in what options are available is where the directors / Board are at in terms of a longer-term future.
Some Board members I have worked with are at the end of their rope. Normally, I am called in after months of stress, and the directors are tired. In those circumstances, I and the Middlebrooks team work to correctly close the business and protect the directors in their fiduciary duties.
In other circumstances where the directors and the Board are up for continuing if contacted at the right time, the range of options is more comprehensive and can be tailored to the circumstances.
This can involve anything from informal arrangements with creditors for debt forgiveness to more statutory arrangements such as administrations or CVAs.
Each of these options has its pros and cons, and it’s our role at Middlebrooks to sit with each company and work through the decision tree to ensure that the tailored solution is found. For example, a company that has prized contracts may benefit from a CVA, whereas the cessation of a limited company and sale to a third party through an administration process may prove the best option to save employee jobs.
Could you describe a particularly challenging case you’ve handled where you were able to help a company successfully restructure?
Over the years, I have had the privilege of working with many companies who have sought my advice at one of the difficult and often private times a company can face.
In one instance, I worked with a London-based firm in the specialist construction industry. This firm was a generational family business with a turnover of circa £20MIL. As with many firms, the initial lockdowns were hard, and coupled with the ill health of the financial director, HMRC debts built up.
In the initial consultation, the executive Board indicated they were tired and wished to give up.
Over the course of the following several weeks, it was discovered that a younger director who didn’t have a full seat on the Board wished to step up. The course of the assignment changed from administration to negotiation with HMRC and the Bank, which had provided a significant Coronavirus Loan.
It has been a great feeling to see those directors over the years and see them save the jobs of more than 200 people.
How can companies prepare and guard themselves against potential insolvency, especially in an unpredictable business environment?
The focus is knowing your business. In the ebb and flow of day-to-day trading, there can be lean months and fuller months. If this is the normal course of trading, then, whilst part of the stress of running a business, it is normal.
As such, really knowing your business does help seek that early intervention, thereby giving you options.
Many businesses will run with a budgeted cashflow, and my first piece of advice would be to ensure that your business has one if you don’t. That is the starting point.
Once your cash flow has been created, you can then run scenarios on the cashflow. For example, what would happen if a major client stopped using your services? Are you too reliant on that one client? Does your business need to diversify? These types of questions can assist in determining whether advice needs to be sought from a restructuring professional.
Given the topicality of the Bounce Back Loan scheme, what advice would you provide to a director who has taken a Bounce Back Loan for legal and legitimate purposes and cannot meet the repayment obligations? What options might they have to navigate this situation?
Currently, in 8 out of 10 situations, the topic of a Bounce Back Loan does exist.
At the risk of repeating, the Bounce Back Loan Scheme was, in my opinion, the right thing for the government to do at the time. However, it is also the right thing for the government to expect these loans to be ingathered for the public purse.
The COVID-19 pandemic has changed the way in which the whole world works, and this has led to the markets for some businesses not being there anymore.
It is true that the Bounce Back Loans were given with no personal guarantee. However, I have seen some financial institutions approach the directors of companies for repayment plans, even if the loans were used correctly. It is, of course, a personal choice as to what the director wishes to do in those circumstances, and we are not here to judge – the director could agree to take on the liability personally, but I would caution against a long-term payment plan as we have seen some significant interest rate rises which could affect that.
HMRC will not allow a director to strike off a company if there is a Bounce Back Loan. As such, the director can seek advice from insolvency professionals. Based on individual circumstances, experienced insolvency professionals can guide the director through the best-tailored process for them and their business.
This could include negotiating a payment plan if the company has a longer-term future or properly closing the company down, ensuring that the director does not incur any personal liability.
One of the benefits of early interaction with an insolvency professional is the time for them to set out route maps based on the information that they can ingather – the more time, the better information, which can lead to sensitised cashflows and future market conditions being tested against business plans.
It’s true that no one has a crystal ball, but making decisions based on research and information is the best way to progress and can assist in the tailored solution.
How do you approach working with the stakeholders involved in an insolvency process, such as creditors, employees, and directors?
Within an insolvency process, there are often multiple competing interests. However, there is often one common thread – it is a stressful experience.
When called in by the directors, they are the first stakeholders we meet. Normally directors are experiencing extreme stress, and, in many cases, this does lead to physical illness. At the outset, the team are always in information-gathering mode. We have several standard documents that do need to be completed from a statutory perspective, and this forms the basis of how we can provide advice and develop a tailored strategy for the company.
The main part of this stage is listening and understanding the journey that the directors and the company have been on up until that point. This narrative is then compared to formal accounts, and a full picture of the situation is formed. It is usual at this stage that we would uncover the priority issues, for example perishable items that we may need to deal with first from an asset perspective or indeed from a liability perspective those creditors who have gone further down the road of debt recovery.
This then gives us a ‘to-do’ list in order.
Irrespective of our priority to-do list when called in, our team at Middlebrooks speak with any employees.
An employee’s claim is complex and often needs multiple meetings and conversations to ingest the information, collate it, verify, and then send it to the government for processing. In our experience, early and often communication is vital for this group of stakeholders to reassure them. In addition, we work hand in hand with government agencies, such as PACE (Partnership Action for Continuing Employment), to get employees the information they need to make claims or seek new employment as swiftly as possible.
In any insolvency proceedings, once appointed, our role is to act on behalf of all creditors equally.
To this end, there are several documents that are sent to the creditors, and whilst we require to set out the legislation, I have always been in favour of ‘tabloid style’ communication for creditors. In many cases, we face creditor apathy.
This can sometimes lead to making our role difficult – as we act on behalf of creditors, we often need their input, but when faced with mountains of paperwork, I can understand why this may turn people off responding!
In my experience, creditors are most interested in whether they will receive funds back from the process and when. Whilst it is right and proper that they be given lots of information to make decisions, they are also running their own businesses, and even institutional creditors don’t often get involved in the process.
There have been significant changes to the legislation to ease the burden of screeds of correspondence to creditors – such as the use of portals which most IPs offer. However, to get the most out of the process for all, I believe that we could go further in this area.
Can you share the steps a business should take once they realise they may face insolvency?
The main area is to ensure you have limited your potential personal liability and to avoid the pitfalls, the following areas should be considered:
You are under a duty to preserve its assets and minimise its liabilities.
You must ensure that any action you take will not result in any creditors or members being preferred or given an advantage, in particular connected parties.
Further credit must not be taken for any goods or services.
You should not accept the delivery of goods already ordered which have not been paid for.
No assets should be disposed of, except to the extent necessary to meet essential costs and expenses, and you should take care not to allow any of the company’s creditors to obtain possession of assets pending investigation by a subsequently appointed liquidator.
You should not supply any goods or services on credit to existing or potential creditor.
Cash or cheques received by the company should be handed over to us for payment into a separate client’s account.
Any overdrawn bank account must not be used.
Adequate insurance coverage must be maintained. Please advise us immediately if insurance cover expires before the date of the meetings.
Company Credit cards should not be used by staff.
No payments should be made to existing creditors.
Goods should not be dispatched with carriers or hauliers who are owed money.
Restructuring and insolvency professionals are well placed to have sensitive conversations surrounding your business – most offer an initial free meeting; in these circumstances, it is best to seek an early conversation to ensure that you protect your own personal position – don’t wait until five to midnight!