The company officially went under after failing to secure a £900m plus bailout on Saturday. Thousands of British holidaymakers found themselves stranded abroad without a replacement flights and others were left seeking assurance that their money would be refunded.

Customers have been left in disarray in the biggest repatriation effort since The Second World War. Similar situations have happened in the past, such as the BMI Insolvency case and the liquidation and collapse of WOW Air, but the chaos of the Thomas Cook collapse is on a different level. Throughout the chaos, customers have been looking to their insurance policies to provide assurance that they will get their money back.

However, two travel policies – SAFI and ATOL – are often overlooked and can be instrumental in protecting your money and trip in such a scenario.

What do SAFI and ATOL cover and why do you need them?

Scheduled Airline Failure Insurance (SAFI) and the Air Travel Organiser’s License scheme (ATOL) are mentioned in a lot of articles recently as Thomas Cook customers seek answers.

By having SAFI cover, you’re guaranteed peace of mind should your provider go into liquidation prior to booking with them. R3, the trade body for the insolvency and business restructuring industries has amplified the message to passengers to take a closer look at their insurance policy. They’re emphasising the value of having SAFI cover.

Often, insurance policies are taken out but not checked by customers, which can lead to missing some important details of their cover. It’s become more important than ever to consult your insurance policies and research the more comprehensive options when it comes to European travel especially. Studies from Defaqto have shown that almost half of UK policies tailored for holidaymakers do not include SAFI cover as standard.

Also, the method of payment that you use for your holiday could also affect the protection available. If you booked your holiday with a credit card then you’ll have more guaranteed protection and right to redress than if you paid via other methods for example.

The other comprehensively recognised travel policy is the Air Travel Organiser’s License scheme — popularly referred to as ATOL.

This cover safeguards customers who are flying from the UK if their provider collapses. It prevents people from paying any extra costs or being left stranded abroad.  Typically, ATOL certification will be included in your booking documentation, so it’s advised that holidaymakers keep reference of these important pieces of paperwork. ATOL purchases are automatically covered, and your travel provider has a duty to declare that their deal fits the outlined regulations.

One important thing to be aware of is that the ATOL scheme doesn’t apply to flights which are booked separately. This is where SAFI cover would come to cover any travellers.

It can be taken out as a separate policy if your insurance doesn’t include it already, and it could also cover any situations of company liquidation in advance.

Liquidation and holiday blues

The holiday blues being experienced by many UK travellers at the moment are not the kind many of us usually associate with the end of a holiday.

Dealing with the aftermath of a large-scale company liquidation can be a long and difficult process often having to go through systemic and other internal issues to find the cause.

We asked Chris Horner, Insolvency Director from Business Rescue Expert for some insight into what is still a sensitive topic: “Normally large companies would be expected to enter a rescue process such as administration and continue trading whilst a buyer is found. This is essentially impossible for an airline, so much so that the costs and complexity of the matter require the company to enter compulsory liquidation, with the Official Receiver as principal liquidator, before KPMG and Alix Partners were appointed. This also had the effect of automatically and immediately terminating all staff contracts of employment.”

“There is some criticism that the government again failed to intervene, however this would set a terrible precedent for large companies that the government will bail out highly paid executives and managers where they fail to manage the company properly. There have been multiple opportunities to avoid liquidation over the past 3 years - by proposing a CVA, or a sale to Lufthanser, however these opportunities were avoided by the board, who will now have to answer to a formal investigation into their conduct.”

While the demise of such an iconic firm is another sad sign of the times, tackling liquidation in the most responsible, considerate way should be a priority for businesses, especially when it involves a large customer base, many of whom are tired, confused and annoyed.

Sources:

https://www.caa.co.uk/ATOL-protection/Consumers/ATOL-certificate/

https://www.manchestereveningnews.co.uk/news/uk-news/how-old-thomas-cook-founded-16968382

https://www.ft.com/content/18c6356f-d806-3fef-9ff7-29fb80a343c7

https://www.theguardian.com/business/live/2019/sep/23/thomas-cook-travel-chaos-insolvency-leaves-150000-stranded-on-holidays-live-updates

https://www.scotsman.com/news/atol-claim-how-to-get-a-caa-refund-for-your-thomas-cook-holiday-1-5009998

https://www.independent.co.uk/travel/news-and-advice/wow-air-collapse-flight-cancelled-airport-passengers-flybe-rescue-a8845401.html

https://www.ft.com/content/ee2d6c72-2afe-11e9-a5ab-ff8ef2b976c7

Describing activities aimed at ensuring that customers pay their invoices within the defined payment terms and conditions, credit management can protect businesses from late or non-payment; contributing to a healthy cash flow and profitability. An effective credit management strategy should be an essential part of any firm’s financial management, but what does it involve and what does best practice in this area look like?

With headlines in 2018 dominated by a number of high-profile financial failures, spanning industry sectors, the rise in corporate insolvencies in the UK came as little surprise.  One of the most common reasons that businesses become insolvent is poor cash-flow management, which means that while their profit and loss accounts may seem positive, they may struggle to make payments when they are due.

To help businesses boost their cash position and to avoid cash-flow difficulties, effective credit management is required to ensure customer payments are received on time. Rather than simply reminding customers to make payments promptly, credit management processes and procedures should be robust and comprehensive – from setting out the right terms and conditions when a new customer is taken on, to procedures for enforcement, should the worst-case scenario occur.

New business is often a key commercial focus for organisations, and owner-managers may be reluctant to have difficult conversations about payment terms for fear of damaging customer relationships. Similarly, they may find themselves extending credit lines or flexing their payment terms to keep a key client happy, without considering the impact on the business as a whole. Other common credit management pitfalls include a lack of investment in systems and dedicated personnel to monitor payments and ineffective processes and procedures for managing invoices and reminders.

Business managers must bear in mind that expanding their customer base will bring little value to an organisation unless customers actually pay their bills on time. When scoping for new business, companies can reduce the risk of late payment by conducting thorough credit checks for all potential new customers before contracts are agreed. However, it’s important to note that businesses’ credit risk can change quickly, so rather than conducting a review once a year or only at the start of a contract, this should be monitored on an ongoing basis, throughout the relationship.

Clear and ongoing communication with customers is also vital to ensure payments are received on time; allowing the business to maintain a healthy cash flow. In addition to keeping a good relationship, where margins allow, owner-managers should consider other methods of incentivising customers to comply with the specified payment terms, for example, offering discounts to those who pay before the due date.

Whether outsourced or managed in-house, businesses should audit credit management processes and procedures regularly. These audits should not only cover processes for issuing routine invoices and reminders, but also procedures for engaging a debt collection agency, and where necessary, starting legal proceedings. Whilst such measures are often regarded as a last resort, they could become necessary if all other efforts at recovering debts have been exhausted. Failing to prepare for a worst-case scenario, could result in financial failure if left too long.

Administered by the Chartered Institute of Credit Management, the Prompt Payment Code sets standards for payment practices and best practice, allowing suppliers to raise a challenge if they feel they are not being treated fairly by a customer. By signing up to the Code, businesses send out a strong message to the marketplace that they are dedicated to maintaining fairness in the supply chain by paying customers on time. Business owners can also look for such credentials when forming new partnerships.

Regardless of the size of their client portfolio, owner-managers who fail to make efficient and effective credit management part of the day-to-day running of the business may find themselves struggling to maintain a healthy cash flow. By implementing best practice in this area, they can guard against late payment, strengthen their cash position and minimise the risk of insolvency in the year ahead.

Bethan Evans is an Insolvency Partner at accountancy firm Menzies LLP.

All directors and owners of a company should be aware of the declaration of solvency - particularly if considering solvent liquidation. The declaration of solvency must be submitted before claiming entrepreneurs relief through members voluntary liquidation (MVL). Business Rescue Experts, licensed insolvency practitioners and specialists in MVLs, are sharing what is involved in solvent liquidation.

What is the declaration of solvency?

The declaration of solvency is prepared before solvent liquidation - providing information on the company’s finances up to five weeks before the winding up resolution - and is split into three different parts:

• Statement of assets and liabilities of the company
• The sworn declaration of solvency by directors
• The endorsement of the proposed liquidator

What is the statement of assets and liabilities?

As mentioned above, this is the first part of your declaration. This statement, in simple terms, represents the company’s financial information ahead of the solvent liquidation. It’s important that all available information is included to avoid a false statement. All assets must be listed, as well as liabilities, and it must also set out the costs of the procedure and any interest returns due to creditors. Similarly, you must outline the returns available for the shareholder once the capital distribution becomes available.

Sworn declaration of solvency

Unlike the statement of affairs - sworn by a statement of truth - the declaration of solvency must be done so by a solicitor or notary. There will be costs involved, typically around £10 per swear. The wording is also critical to the declaration and must comply with insolvency legislation.

The proposed liquidator

The proposed liquidator of the case will present the declaration of solvency to the shareholders of the company. From there, resolutions can be made for the business to enter solvent liquidation, and the liquidator will also endorse the document. This will then be made public and placed on record at Companies House.

Once the procedure begins, the assets of company will be realised to pay off the remaining creditors. The balance will then go to the shareholders by way of capital distribution. Any eligible shareholders can also claim entrepreneurs relief.

What if I provide false information?

A false declaration of solvency is a serious threat to the future of your company. It’s important to note that you cannot be suffering from the early signs of insolvency before opting for this procedure, so you must seek advice at the earliest possible opportunity. An insolvent company is one where liabilities exceed the assets, and, therefore, your business is not suitable for solvent liquidation.

If your company is found to be insolvent, your company could be placed into creditors voluntary liquidation (CVL). Similarly, an MVL could become a CVL if creditors come forward with outstanding debts that have not been paid and submit claims against your business. If this does happen, there is also a chance that you - as a director - could face criminal charges. While you could face disqualification, for a period of up to 15 years, imprisonment is also an option in the most severe cases.

Ultimately, you must always ensure your company is solvent and there are no creditors to worry about. If not, you must seek advice from insolvency practitioners immediately.

Recent news reports regarding Marks & Spencer’s shop closures have left other high street retailers feeling fearful about profits.

With plans to close 100 stores by 2022, in what M&S bosses are calling a re-organization of the entire retail chain, the aim is to turn a third of its in-store sales into online sales.

This of course is another blight in the midst of a global retail infection, predominantly caused by the propagation of online buying. Below Finance Monthly hears Your Thoughts on M&S’ shop cuts and the potential consequences across the UK.

Joe Rabah, Managing Director for EMEA, RMG Networks:

With the recent announcements that M&S is said to close 100 stores and that House of Fraser could close up to half its stores, it’s no secret that the UK high-street is under pressure as a result of changing shopper behaviour and a drastically altered customer journey.

For retailers to survive and adapt they must embrace technology to create meaningful, immersive retail experiences. However, it’s not enough for retailers to invest in technology without doing so in a purposeful manner and knowing the solutions that they invest in are going to be specifically relevant to their business and their customers. It’s essential that retailers use platforms that create frictionless purchasing experiences for their customers, enabling them to increase customer engagement that is tailored to individual customer needs and habits. In doing so they will drive customer loyalty and provide consistent cross-channel experiences. Today’s solution is not tomorrow’s in retail, and technology can either allow a brand to pivot so that it can adapt quickly to changing customer expectations, or it can lock a brand into delivering stale customer experiences.

While we don’t know what the future holds, retailers must understand whether the technology they are investing in suits a clearly defined purpose and is adaptable enough to suit their future needs and their customers’ evolving customer expectations, and consider this before making any technological investment.

Julian Fisher, CEO, Jisp:

With retailers, such as Marks & Spencer, facing large declines in high street spending as consumers turn to online shopping, bricks and mortar stores must evaluate how they are interacting with customers. We are a nation of shoppers and shopkeepers, but convenience is a key factor in driving potential instore customers online where they have access to a wealth of information, deals and personalised offers. To keep customers in stores, the high street shopping experience must provide this instantaneous access to information and personalisation through handheld devices. It is essential that retailers increase investment in areas such as mobile technology to bring the shop floor into the 21st century.

The restructuring decisions that Steve Rowe is making will have the desired effect with these future-thinking closures a controlled choice with M&S in charge of its own destiny. Customer service and quality of merchandise has been a hallmark of M&S for years.

Looking ahead, it will be innovation and the ability for stores and their staff to connect and personalise their brand with new customers who are armed with devices and a world of information and content. If they don’t they may succumb to the fate of others who have been unwilling to embrace changing consumer behaviours.

Iain Wells, Investment Manager, Kames Capital:

Will M&S shares be up or down tomorrow when they announce their results? I don’t know. Expectations are certainly low with earnings forecast to be down nearly 10%. The bad weather in the first quarter, that kept shoppers at home, has been so widely discussed that it can surely provide no negative surprises. With a dividend yield of 6.3%, and a price earnings ratio 9.8x, results that are in-line with expectations could see the shares rise.

While the share may rise on the day, more important is what evidence there is that the structural pressures that have impacted M&S over many years are easing. On this I am less confident. It is not that M&S is a “bad” retailer, just that the retailing world is changing around it faster than it can adapt, and the process of adaptation is painful for shareholders.

The key issues that M&S are trying to address include:

• Too many stores - too much is of the wrong size or in the wrong location. Addressing this is usually costly
• The increase in competition, particularly in clothing, and much of it from on-line players
• The shift to on-line which puts downward pressure on the store profitability, even if the on-line sale is made by M&S rather than a competitor
• Competitiveness of the food offer. With much of the growth of the business centred around food getting this right is crucial.
• Stabilisation/growth in market shares

Everyone has a view about M&S, what they are doing well, and what they are doing badly. As a national institution management have the misfortune of having to carry out their plans on a very public stage.

Terry Hunter, UK Managing Director, Astound Commerce:

The news of the M&S store closures is yet another dagger in the heart of the British high-street. The retailer plans to move a third of its sales online, and intends to instead have fewer, larger clothing and homeware stores in better locations. If the company is going to recover from its recent sales slump, it is imperative that it has an exceptional online offering. It will now be competing more directly than ever with the likes of Amazon and Asos.

Online retailers like Asos take advantage of efficient and nimble business models by avoiding the costly overheads associated with running bricks-and-mortar stores and as a result, they can afford to invest a great deal in offering websites which give the best possible user experience. Although M&S is cutting back on some of these overheads, it is not as experienced or effective in the ecommerce arena as the pureplay online retailers. M&S needs to make sure its in-store offering works in harmony with its online strategy. The retailer struggled over the Christmas period last year – basic logistical errors caused a real headache as next day delivery targets were missed – a type of error you don’t see the likes of Amazon making. A truly omnichannel approach is the only way that this British retailer is going to recover, let alone flourish.

One factor that is working against M&S is that its customer base has an ageing demographic. The company has been making efforts for some time to attract a younger shopper and an improved online offering could potentially aid this. A younger tech-savvy shopper is more likely to make purchases online rather than instore. One of the key battles for M&S will be ensuring that its predominantly over-50 female shopper continues to visit the new stores, whilst also becoming more active in buying products from its website. It is a difficult road ahead.

Paul Fennemore, Customer Experience Consultant, Sitecore:

M&S faces a similar challenge to many other retailers – in trying to find out exactly who its target market is, and what they want, ahead of them wanting it. Evolving a customer experience strategy on the basis of anticipating needs in this way will require a very sophisticated, multi-channel, cross platform customer experience strategy in place, each of which must feed the other to create a total experience that is worth more than the sum of its parts.

One way it could go about reinventing itself online is to go beyond personalisation – which all brands claim to be able to do – and move to individualisation. This will deliver content to its customers based on specific data points. This will help set it apart from the other online retailers, and help it provide its customers with an unexpected, satisfying experience which will keep them coming back.

By creating a robust individualisation strategy, focusing on customers as individuals, rather than using the more traditional broad personas, M&S will be able to attract a younger, mobile-first demographic, who value individual interactions with brands. The challenge here will be to ensure that experience is consistent across all channels, including mobile, online, social media, and in-store. Integration of its systems will be key for M&S going forward, otherwise customer data will be siloed, meaning they won’t be able to track a customer’s journey efficiently. This will ultimately lead to a worse customer experience, as it won’t be consistent.

Ben Holmes, Head of Display, Samsung UK:

Yet again, we’re seeing more boarded up shop fronts on the British High Street with M&S recently announcing a series of store closures. We understand the predicament M&S is in as it sets about ‘modernising’ its business to ‘meet the changing needs of customers;’ but at the same time, we do believe that bricks and mortar establishments can be part of the modernisation effort rather than being the sacrificial lamb to more investment in online. When every retailer is battling for the same pound spent, businesses definitely need to be more innovative in how they sell to their shoppers. The old rules no longer apply when it comes to in-store retailing in an age where shoppers expect personalisation, digital connectivity and high impact experiences. We’d encourage retailers to experiment with digital technologies like video walls and touchscreen kiosks because these technologies have been proven to drive engagement and sales. Physical stores are definitely not secondary to online retail estate because there is a real opportunity for companies to transform their stores into experiential destinations – think brandship not just flagship. Until retailers start delivering genuine, digital experiences, we can unfortunately expect more casualties.

Adam Powers, Chief Experience Officer, Tribal Worldwide London:

This latest announcement is yet another indicator of a malaise that’s been hanging over UK retail stalwarts for the past few years. The inexorable growth of online commerce means that a strategic rethink must be undertaken for businesses that want to successfully trade on the UK high street. Actually, this is a global challenge, but the UK is one of the most advanced ecommerce markets in the world and so we are seeing the outcomes here earlier. Like Mothercare, M&S is clearly trapped in the middle of a market where they are being squeezed at both ends. Cheaper or more fleet-of-foot competitors are doing product innovation around food (Aldi/Lidl) that was once an M&S sweet spot. Away from food, key competitors have high performing home delivery infrastructure like Next or ASOS that leave M&S looking lumbering and out of touch with modern customer expectations. Additionally, M&S are getting squeezed from the top as style needs for their target demographics are increasingly met by internet optimised clothing competitors. The wrapper around all of this is really customer experience - online and instore, this is the modern retail battleground. From the outside looking in, it appears that nobody at M&S is looking at customer experience holistically, with a mandate to drive radical, customer-centric transformation and the initiatives underway, such as store closing, look piecemeal. What’s particularly worrying about M&S delivering a turnaround, is that the way things are emerging must be highly unsettling for the workforce, the very people who are at the frontline of delivering customer experience.

John Taylor, Co-CEO, Duologi:

The internet has made it easier than ever before for customers to compare prices and shop around online, without ever having to leave the comfort of their homes. This subsequent decrease in footfall to the high street has led to a number of high-street brands opting to close stores where footfall has dwindled to save on overheads, with M&S being just the latest example of this.

However, this does not mean that the high street is dying – far from it. Rather, we’re seeing a shift in the retail landscape, wherein the retailers set to thrive will be the more flexible, agile brands which can offer customers a choice in how they shop and pay for products.

To accomplish this, savvy smaller retailers are taking the time to optimise their online presence to sit alongside their bricks-and-mortar offering, engaging customers who no longer shop with a brand due to ongoing store closures.

This flexibility also extends to the payment process itself. With consumer confidence currently low, flexible finance options such interest free credit, 0% finance and buy-now-pay-later can support shoppers at the time of purchase – particularly for big-ticket items – which can both engender consumer loyalty and increase average basket values.

Charles Brook, Partner, Poppleton & Appleby:

We should be careful not to jump to conclusions. There is undoubtedly an acceleration of change in the retail market with some large towns experiencing retail depletion more than others. Statistics released this week in Yorkshire put Doncaster, Barnsley and Huddersfield towards the top of those hit hardest by a combined net loss of more than 1,000 retail outlets in the past 12 months.

Marks & Spencer is shifting the focus of its in-store offering away from homewares and clothing to place emphasis on and serve its online offering in a more contemporary manner. This is a sensible response to the evolved way in which even its traditionally conservative-minded customers now shop and, having such a significant leasehold estate, and it needs to plan well ahead. I think it highly unlikely that M&S would try to foist a Company Voluntary Arrangement on its landlords.

Perhaps this is a good time to deliver seemingly bad news. The M&S Board may be gambling on the market and its major shareholders (if not the public at large) recognising that whatever issues have hit other big names, M&S is reading the trading conditions and charting its future trading strategy with typical caution.

Rick Smith, Director, Forbes Burton:

Retail is going through a transition, and a transition that M&S should have seen coming, especially with the likes of Ebay / Amazon etc dominating the way people shop, but unfortunately for all those concerned (towns, cities, the high street, communities, shoppers, staff) they didn’t. High street shopping is now all about the experience.

However, it’s not just the blue-chip retailers fault, it’s a collective from councils, property owners and communities. This should have been recognised and adaptive investment should have been put in place a long time ago. The problem we have now is that it’s all knee jerk and I’m not convinced they are going about it the right way. Closed high street shops is simply demoralising for the community and once the reality of it sets in it’s quite scary when you start thinking more about it.

M&S haven’t kept up with the times and they need to look at online sales especially for the struggling clothes and homeware sections. While they’ve been able to do well compared to their competition by attracting females to their clothing range, they have failed to find their proper place in the market on this side of the business and need to get this totally right. Also, many of the stores need modernising which is difficult when profits are dropping and there’s no money for investment.

Their food range is nice and appeals to a small, specialised section of the population. However, competitors have caught up with their food offerings and often for much less with most now doing a ‘finest’ or similar range. A small percentage do also believe the bad press around packaged meals, and this combined with the offerings from the competitors has had a knock-on effect because there has been no differentiator in terms of quality. M&S food is of very good quality, but it is now evident with these closures that they do not have the resources to convince the public otherwise.

Emma Thompson, Head of Strategy, Visualsoft:

E-retail is booming at the moment, with consumers currently spending a staggering £1.2 billion a week online. As such, high street retailers need to make the most of this opportunity to ensure they have the best chance of success. Those who fail to do so can expect to fall behind more digital-savvy competitors, as we have seen with the likes of Toys ‘R’ Us and Maplin.

While it still remains to be seen whether Marks and Spencer’s store closures will help boost performance, it is heading in the right direction by using this restructure to support the growth of its website. This forward-thinking attitude could see the retailer maximising its growth potential, as the majority of the UK’s top retailers that neglect their online offering risk stunting their growth as a result.

For Marks and Spencer to effectively focus its efforts, it needs to not only improve its website’s user experience, but also utilise a variety of online channels to boost revenue. Social media in particular should be a priority, given that a growing proportion of e-retail sales are driven through the likes of Instagram and Facebook. If the retail giant prioritises these areas, it can expect advantageous results to follow.

Leigh Moody, UK Managing Director at SOTI:

The decision to close 100 stores over the next four years is a bold decision from one of the UK’s leading retailers and highlights the shift in focus from high-street to online in order to keep up with evolving consumer trends.

In response to this change and to support its online growth plans, M&S will need to consider how they integrate their mobility management strategy across their entire on and offline operation to ensure they are streamlined, data is protected and customer demands are met.

As M&S becomes more digitally enabled across all channels including mobile and social, mobility will be key in influencing the shopping experience, touching every part of the value chain which in turn, will lead to further opportunities for cost savings and buying efficiencies.

We would love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

An anticipated rise in UK and European corporate insolvencies over the next two years should be prompting both borrowers and lenders to take early advice where they have concerns about businesses' solvency outlook, says Ogier offshore restructuring specialist Simon Felton.

Simon, a partner in Ogier's Banking & Finance team, was involved in several post-financial crisis restructurings, including the receivables trustee of a £13.5bn portfolio of UK RMBS as well as portfolios of loans in the Irish banking industry and regulatory capital in the Austrian banking sector.

Recent reports have forecast that British insolvencies are set to rise by 8% in 2018 – the second highest rise worldwide, after China – and that the increasing likelihood of rate rises and the end of quantitative easing by the European Central Bank in 2019 threaten a similar increase in Europe.

Already this year, UK firms including Carillion, Toys R Us and Maplin have been declared insolvent.

Simon said that the tightening interest rate and liquidity climate should be prompting both borrowers and lenders to take advice and consider what action may be necessary now, rather than delay when options may be reduced.

He said: "Whether you're a borrower or a lender, you should be analysing each company's solvency position, particularly where those entities are reliant on group support to meet their obligations, and if you think that there are issues, taking advice early as to what your obligations or rights are, and what course of action you should take.

"Early analysis, advice and action is crucial. For directors of debtors, the nature of their obligations changes as the solvency position of the company deteriorates, as does the ability of lenders to protect themselves.

"The regulatory picture may have changed significantly over the last ten years, particularly for financial institutions, but the combination of quantitative easing by the ECB and low interest rates coming to an end may pose a test for some businesses."

(Source: Ogier)

Born and raised in Sydney, Australia, Richard Cacho is a Chartered Accountant (ICAEW) and a Licensed Insolvency Practitioner (ICAEW) with over 30 years of commercial and professional experience. After moving to the UK eight years ago, he established his boutique business recovery, turnaround and insolvency services firm – RCM Advisory. Based in Norwich, with satellite offices in London and Cambridge, the company provides services to the SME sector. Below, Finance Monthly speaks to Richard about insolvencies in the hospitality and retail sector and the importance of seeking specialist advice as soon as your business sees any warning signs.

What have been any recent changes in the hospitality sector, from an insolvency perspective?  

There has been an explosion of chain restaurants during the past ten years that offer consistent and reliable restaurant food (a cut above fast food but far from fine dining) to the masses at a reasonable price point. Initially, this was exciting and it seemed as though a new brand (‘flavor of the month’) was launching every month.

The costs of establishing several premium locations, in large premises and with themed fit-outs were substantial and these chains needed to find success quickly in order to recoup set-up costs and to pay for high fixed operating costs.

This market segment is now oversaturated and the cracks are appearing, as it is increasingly difficult to generate the footfall and custom required to sustain profitable operations in the face of stiff competition across the board. Giants of the sector such as Byron Burgers and Jamie’s Italian are recent casualties and are closing numerous outlets under the strain of massive debts and unprofitable trade.

I see rapid consolidation occurring in this sector and many of the chain restaurant brands will be forced to reduce the number of outlets they operate and to keep only flagship outlets and smaller, profitable ones, located away from the flagship. Thus, the brands won’t all disappear but I expect a reduction in the number of restaurant locations.

Is this all bad? No; opportunities will arise for entrepreneurial restauranteurs to fill the void with interesting, standalone restaurants that will be offering more bespoke dining experiences!

How is the increasing popularity of online retailing affecting the brick and mortar retailing?

I believe that traditional brick and mortar retailing is doomed and the evidence is all around us. I am not afraid to admit that I do most of my shopping online now, so, in a way, I am contributing to the realisation of my own prophecy!

When I go to the shops, which is rare these days, I’m either being dragged around by my wife and teenage daughters or I am on a mission (like every man) to buy a specific item that I’ve already researched online. My observations are that there are many shoppers browsing but I don’t really see many people buying. Many retail outlets in shopping malls have more staff than customers. That’s how it looks to me anyway.

This is not very scientific so far, I know. On the other hand, however, I do know that courier companies are doing a roaring trade delivering items purchased online. This is how I do most of my shopping these days. The convenience, the discounted prices, the money back guarantees, the great choice, etc. - it is the way of the future as far as I can tell!

What do brick and mortar retailers need to do in order to adapt to the change?

It might sound a bit extreme, but I think the operators of retail businesses need to rapidly adapt to the seismic shift in consumer behavior and wants or face extinction - or face certain insolvency. As an insolvency professional, I do have some ideas to offer my clients, on a case-by-case basis; one example of what could be implemented would be a hybrid system of retail.

In your opinion what will the future of brick and mortar retail look like?

Following on from my answer to the previous question, I believe that the future of retail is for much smaller retail floor space, where a selection of items would be available for customers to view and try, combined with an online ordering and delivery system. This would provide a perfect blend of a touchy-feely shopping experience, competitive pricing of goods and the convenience of having the goods delivered to one’s home or place of work. My vision for the future of retail has implications for both shop owner/operators and investor/landlords.

What’s the importance of seeking specialist advice as soon as you see warning signs of possible business insolvency?

Enormous. Early intervention strategies are more likely to succeed and will provide more options and flexibility. RCM Advisory offer a no-cost and obligation free initial consultation, so there are no excuses if you think your business is heading in the wrong direction.

Contact RCM Advisory on 0800 288 4088 for a no-cost and obligation free initial consultation.

Website: http://www.rcmadvisory.co.uk/

Finance Monthly speaks to James Butler – experienced practitioner, business adviser to SMEs and Consulting Partner at GBW – an Irish company that wants to make sure that a choice exists for those smaller businesses that require a more hands-on approach than that offered by the larger firms.

What are the key services that GBW offers to clients?

We are a mid-tier firm of accountants and business advisers with varying specialties and backgrounds. Our services range from assisting with Audit, Assurance, Taxation and Accounting, through to Business Advisory and Corporate Recovery. Our cross-border service offering, business approach and sector expertise is primarily designed to support Small and Medium-Sized Enterprises, or organisations of equivalent scale, with existing or planned international operations.

GBW is an independent member of TGS – a global accountancy and legal network of independent firms specialising in the provision of accounting, audit, tax, business advisory and commercial legal services.

Tell us more about TGS?

Not all networks that are part of the group are the same. TGS member firms are all independently owned and share an entrepreneurial approach to their own and clients’ businesses. We have a shared commitment to the highest levels of technical expertise and professional standards. Our clients enjoy a rapid access to quality assured in country experts across the world, via a single point of contact.

We recognise that every client is unique and our cost-effective solutions are tailored to our clients’ unique requirements. Whether they require a full suite of accounting and business solutions or a one-off specialist service, TGS Global can provide precisely what our clients require, no more and no less.

You have extensive experience in Insolvency & Corporate Restructuring, and have acted as liquidator in both creditor and member voluntary liquidations. What does your role within GBW entail?

In my role within GBW, I deal with banks and financial institutions in all areas concerning distressed property and non-performing loans. I’ve also been involved in debt management and refinancing for both companies and individuals.

Additionally, I am also an experienced practitioner in taxation and business advice for businesses in the area of the licensed trade, professional services and medical practitioners.

GBW’s Services:

Audit and Accounting

We aim to help our clients see the audit process as a benefit to their business, not just a cost.

Taxation

Our taxation department has expertise in all categories of taxation, both our corporate to personal clients.

Business Advisory Services

All businesses require planning – form start-ups to mature businesses. Our business advisory experts can assist with the planning and execution.

Accounting

Our Accounts department provides all types of assistance, whether be in-house or out sourced, we have the expertise.

Corporate Finance

If you are selling, buying or merging a business. If you are making an investment or raising finance – we can help with the decision making process.

Forensic and Litigation Support

In today’s changeable economic environment, business disputes are becoming more frequent and litigation is on the increase. At GBW, we draw on the firm’s wide expertise of our accounting professionals to advise our clients in claims assessment and provide independent expert accounting witness services.

Recovery and Restructuring

We are leaders in the provision of insolvency and restructuring services. Our team comprises of insolvency experts, forensic specialists and support staff who work together to provide a comprehensive and complete solution to any restructuring or insolvency project.

Website: http://gbw.ie

Insolvency practitioners are required by law to take out a bond to provide appropriate levels of security to cover any losses as a result of fraud or dishonesty on their part. Stakeholders have told the UK government that current arrangements are inflexible and prescriptive and fail to protect creditors.

Following the government’s publication of plans to revise bonding requirements for the insolvency profession, Adrian Hyde, President of insolvency and restructuring trade body R3, has this to say to Finance Monthly:

“With the insolvency and restructuring profession increasingly concerned about rapidly rising premiums for smaller firms and the perceived adversarial nature of the bond claim process, the government’s call for evidence into the issue was timely and necessary.

“Insolvency practitioner bonding is there to ensure creditors are protected if things go wrong, but unaffordable premiums could force small firms out of the market. Without a diverse insolvency profession, the UK insolvency framework’s ability to rescue jobs and businesses and return money effectively to creditors will be compromised. This will have a knock-on effect for UK plc.”

Adrian Hyde adds: “It’s very important for the government to follow up this call for evidence with further research into the market: empirical evidence is needed to shed more light on the issues that have been identified. There are some fundamental questions that need to be resolved, including whether bonding is the right way to protect creditors in the first place.

“One step that can be taken in the short-term is the development of a claims management protocol. While this would not deal with some deep-seated issues with the current legislation, a protocol would help improve communication and transparency and would simplify the claims process for all parties.

“R3 has worked closely with insolvency practitioners, creditors, and insurers on this matter and we look forward to continuing this work and working with the government to find a practical solution to concerns over the coming months.”

Restructuring attorneys and advisers predict that the energy and retail sectors will be the most active for out-of-court restructurings this year, according to The Deal, a business unit of TheStreet, Inc.

Early in the first quarter of 2017, many restructuring attorneys and advisers were certain that the healthcare industry was heading for a wave of out-of-court restructurings and bankruptcy filings because of President Trump's vow to repeal and replace Obamacare.

After Trump's first proposed legislation stalled and a second try at passing a bill squeaked through with minimal support, advisers are no longer certain that Trump's assault on The Affordable Care Act will be a threat to the healthcare sector this year, as they first thought. Advisers are now asserting that companies in the energy and retail sectors will be more active this year seeking out-of-court restructurings than the healthcare industry.

"A long list retailers led a parade of out-of-court restructurings in the first quarter with many of them, such as Macy's, Sears Holding Corp. and J.C. Penney Co., announcing dozens of store closings." said Kirk O'Neil, out-of-court restructuring reporter at The Deal. "The retail sector will continue to be the most active industry seeking out-of-court restructurings in the second quarter, followed by some oil and gas companies that are trying to avoid Chapter 11 filings."

The Deal's exclusive ranking covers the top global advisers involved in out-of-court cases filed between January 1st and March 31st 2017.

Some highlights from the report:

• Lazard Ltd. was the top financial adviser to distressed companies in the first quarter, with 28 deals. Houlihan Lokey Inc. was second, with 19 deals. Rothschild & Co was third, with 13 deals. Evercore Partners Inc. ranked fourth with eight deals. Rounding up the top five was Moelis & Co., with seven deals.
• Houlihan Lokey Inc. was the top financial adviser to creditors, with seven deals. Moelis & Co. LLC was second, with six. PJT Partners Inc. ranked third, with five deals. Lazard Ltd. and Rothschild & Co tied for fourth, with four deals. Ducera Partners LLC ranked fifth, with three deals.
• Among law firms, Kirkland & Ellis LLP was the top counsel to distressed companies, with 10 deals. Latham & Watkins LLP ranked second, with six deals. Cleary Gottlieb Steen & Hamilton LLP and Davis Polk & Wardell LLP tied for third, with five deals each.
• Milbank, Tweed, Hadley & McCloy LLP ranked first for the top counsel to creditors, with 18 deals. Paul, Weiss, Rifkind, Wharton & Garrison LLP ranked second, with 14 deals. Latham & Watkins LLP ranked third, with nine deals. Proskauer Rose LLP ranked fourth, with five deals. Cleary Gottlieb Steen & Hamilton LLP and Gibson, Dunn & Crutcher LLP tied for fifth, with four deals each.
• AlixPartners LLP and Alvarez & Marsal LLC tied for the top restructuring advisers to distressed companies, with nine deals each. FTI Consulting Inc. was ranked second, with six. Zolfo Cooper LLC was third, with three deals. And PricewaterhouseCoopers was fourth, with two deals.

(Source: The Deal)

To find out more about insolvency and restructuring proceedings in the UK, Finance Monthly reached out to one more professional operating within the sector. Garry Lock is a partner with Quantuma - a leading restructuring and insolvency practice, delivering partner-led solutions to businesses and individuals facing financial distress, with offices in London, Southampton, Marlow, Watford, Brighton and Bristol.

As a professional whose practice spans sectors from retail to recruitment, what are the sectors that experience insolvency and restructuring proceedings more than others in the UK?

Those sectors that would experience the highest number of failures would be those with low barriers to entry and low, or no regulation. Businesses which have a high-fixed cost base and rely upon high-volume and low-margin sales also struggle when the economy is unstable. An example would be a retail chain of shops or restaurants.

Construction always has a moderate level of failure because contractors often have to fund projects for considerable periods of times, whereby the profit element is typically not earned until the project is completed. Project holdups, not always the fault of the contractor, can create a cash flow crisis or, in a worst case scenario, the failure of a company.

An understanding and appreciation of the working capital cycle for a business, as well as having a sufficient working capital base to support the turnover, is key. The significance of understanding margins, costings and break-even are often overlooked.

Sectors that also experience high-failure rates often struggle with an overview of the company finances to the point where decisions are made, which decisions tend to be more reactive than proactive. Smaller business in particular often don’t survive a bad trading year.

The continuing recovery in the UK economy has resulted in corporate insolvency falling down steadily in 2015– how have these trends impacted your practice over the past twelve months?

Quantuma was set up in early 2013 by industry veteran Carl Jackson. In the last 4 years the firm has grown to a 12-partner firm, employing over 100 staff in 6 offices. Our firm has grown when other firms have cut their restructuring teams. Quantuma was ranked in the national top 10, for number of formal appointments during the calendar year 2016. The firm has managed to grow market share in a declining market through its good connections and the hard work of the partners and staff.

Market conditions are very challenging, so with declining numbers of formal appointments you have to adapt your approach and also deliver an excellent service when the opportunity arises. Reputation is very important.

The partners in the firm have a good referrer base, which means that we engage with a wide range of stakeholders and retain a high level of input into the work that is carried out.

The firm has a strong management structure which enables flexibility to make decision and to act quickly when opportunities arise. Maintaining regular contact and an open dialogue with those who refer work to you is vital.

What are the typical issues that you face when conducting investigations on corporate and personal insolvencies?

Investigations in insolvency proceedings are carried out for a number of reasons. Primarily, the purposes in both corporate and personal insolvencies is to identify and recover assets for the benefit of creditors. In addition, there are instances where insolvencies give rise to claims that can be pursued by insolvency practitioners where there has been wrongdoing. These claims are covered by both the Insolvency Act 1986 and the Companies Act 2006.

For corporate insolvencies, the actions of the directors in the period after the company became insolvent will also come under close scrutiny to establish whether they have acted in a way that has either enriched themselves or prejudiced the interests of creditors individually or collectively.

Investigating personal insolvencies is generally more challenging than for corporates. This is largely due to the lack of an audit trail for the affairs of an individual, which is often present, in one form or another, for a corporate.

Albeit it is a criminal offence if an individual fails to deliver up a full account of their affairs to the Official Receiver at the outset of a bankruptcy, there are often occasions where full disclosure has not been made. The insolvency practitioner will need to build up a picture of the person’s affairs either with, or sometimes without, the cooperation of the individual.

Not all individuals are fully cooperative with the proceedings, particularly if you are contemplating bringing proceedings for the recovery of assets they might have transferred to third parties before they were made bankrupt. There are sanctions available to deal with instances of a lack of cooperation with the use of court proceedings for interviews and the option to suspend the individual’s automatic discharge from bankruptcy proceedings being available. This does not however always achieve the desired outcome and some individuals can remain bankrupt for many years until they decide to cooperate.

The extent of any investigation will largely be determined by the level of the insolvency, the type of claims against the individual and also representations made by those creditors. If the information and representations provided by the directors or individual are considered reasonable, then investigations may be little more than routine searches. Conversely, if it is clear that the position as a whole just doesn’t stack up then it may lead to follow up detailed investigations which may include reconstructing accounts from incomplete company records, applications to court to deliver up information or even oral examinations.

Corporate investigations tend to have trail to follow and the starting point is a review of the statement of affairs of the company provided by the directors, and then comparing it to the last filed statutory accounts. This helps to assess what happened in the final period of trading and whether it supports the directors’ version of events.

Further review of the company’s books and records, back-ups of electronic data, information obtained from professional advisors and also representations made by the company’s management and its creditors should provide most of the answers. It is rarely the case that the company’s records are up-to-date and complete at the point of insolvency. We also consider whether management have any other entities trading that might suggest the company’s assets, both tangible and intangible, have been transferred.

With all corporate insolvencies, the key aspect is to establish when the company became insolvent and what happened in the period from that point through to the company entering an insolvency process.  There are two tests to establishing insolvency. The first is the cash flow test, which is the point at which the company could not pay its debts as and when they fall due. The second test is the balance sheet test. The point at which the company’s liabilities exceeded the value of its assets. Proving insolvency can sometimes be problematic but there will often be information available to be able to pin point an approximate date.

The next stage is determining what happened from that date through to the date of the insolvency. In essence, did management recognise that the company was insolvent and can we establish what steps were taken by management to address the decline. If no proactive steps were taken, the directors may well be liable but in all instances the evidence has to be clear and presented in a format that can be put before a court if an agreement cannot be reached on settlement.

Creditors’ expectations can be unrealistic and have a tendency to focus on self-interest. Managing those expectations at the outset can also influence the level of investigation work carried out. For larger assignments the formation of a creditors committee can be useful for the purposes of assisting with the understanding of the affairs of corporates.

With any investigation there has to be an element of proportionality and so a cost benefit analysis is always required. The insolvency practitioner has to consider whether detailed work will ultimately lead to a recovery for the benefit of the company’s creditors taking into consideration the costs that may arise from a recovery action by legal process which is always costly and risky. Furthermore by the very nature of the matter there may not be funds available initially to cover detailed investigation work so the insolvency practitioner needs to weigh up the risk of not being paid.

What are the most common tactics that you implement when assisting distressed corporations with restructuring?

Firstly you need to understand how much time you have to implement changes. Where time is short and directors have left it too long, to the point that creditors are threatening winding up, then an insolvency process may be necessary whereby the process is a precursor to restructuring the business operations.

Where circumstances are not quite so critical and you have more time, you need to assess how restructuring will be most effective and so a business review of current operations should be carried out. The level of detail of the review will depend upon the size and complexity of the company’s operations as well as the extent of the company’s current losses. The business review will cover an assessment of the past and current financial performance as well as an overview of the operational aspects of the business. It may also cover the strengths and weaknesses of existing management. The review will highlight the aspects of the business that are both good and bad, and will aid the formation of a number of strategies that should assist turnaround.

Typically the initial focus will be trying to return the company to profitability in the shortest possible time frame.

An assessment of how that will be achieved will be quantified in the business review following which a cost reduction programme and efficiency drive will be implemented. This is likely to include rationalisation of the workforce, as well as a review of the remuneration policy for management which may not be in keeping with financial performance. Those assets that, after review, are considered to be non-performing will be sold.

Sometimes less means more. Often management become obsessed with ever increasing turnover at the expense of profitability and so cutting high volume, low margin products can result in considerable cost savings and increased profitability. Pricing will also need to be assessed.

Over time management can lose focus. Furthermore, corporate governance is often lacking with distressed companies. A refocus of corporate strategy, financial budgets, cash flow projections and key performance indicators will be necessary to understand what is realistic in the short and medium term.

What is the likelihood of insolvency and restructuring processes that cannot save a company and what are the circumstances that typically lead to liquidation? How common are Company Voluntary Arrangements, Creditors Voluntary Liquidations and Members Voluntary Liquidations and how do you assist with them?

For any restructuring process you need the support of the stakeholders of the business, whether that be management, employees, banks, funders, customers and suppliers to effect change. Sometime despite best efforts of management and their advisors, external factors can undermine the restructuring process. An example of this would be the loss of a major contract or key members of staff, high exit costs of an unprofitable contract. These situations can make the company’s operations not financially viable whereby the only option will be to liquidate the company.

Company voluntary arrangements are a useful process where a company may have experienced a one off event such as a significant loss on a contract or a bad debt. Again viability is key to whether it is the correct procedure and also whether there is sufficient working capital to keep trading. There are also other factors to consider because a CVA can last up to 5 years. During that time the company’s credit rating will be recorded as poor meaning that it will have a knock on effect to securing new contracts.

Creditors Voluntary Liquidations form the majority of work for insolvency firms. The process appropriate for directors to wind up failing companies before it reaches a stage of creditors taking their own enforcement action with winding up petitions.

Members voluntary liquidations (MVL’s) apply to solvent companies and are a tax efficient way of winding up a company that has reached the end of its useful life and has surplus capital to return to shareholders. Where the company is not part of a group, by using this process, it gives rise to lower tax for the shareholders and also the option, should the criteria be met, to claim Entrepreneur’s Relief. For group companies the MVL process can end unnecessary administration of maintaining compliance.

The MVL process is very common. With most instructions of this nature timing is very important, particularly with owner managed businesses.

For more information, please go to: http://www.quantuma.com/

Ben Rhodes is a Director at Grant Thornton, Channel Islands. He is a Chartered Accountant, UK Licensed Insolvency Practitioner, Certified Fraud Examiner and qualified Trust and Estates Practitioner. He has specialised in the areas of restructuring, insolvency and forensic investigations since 2003, helping company directors, creditors and other stakeholders. He began his career in London before moving to the Channel Islands in 2012.

 Grant Thornton has the largest single dedicated recovery and reorganisation practice in the Channel Islands, with three UK Licensed Insolvency Practitioners supported by a team of experienced accountants and fraud examiners. Here Ben tells Finance Monthly more about the insolvency and restructuring processes in the Channel Islands and specifically Guernsey, as well as what makes him a thought leader in the sector.

What are currently the hottest topics being discussed in relation to insolvency and restructuring trends in the Channel Islands?

The concept of “Insolvent Trusts” has gained much attention in the Channel Islands in the last couple of years and remains a hot topic now.

It is debatable whether a Trust can become “insolvent”, as it does not have its own separate legal personality. However, a Jersey ruling in 2015 in Re Z Trust has helped provide clarification. This matter concerned a Trust that had insufficient assets to meet its liabilities, as they fell due and was therefore insolvent on a cash-flow basis. The Court recognised that it was incorrect to describe the Trust as “insolvent”, however acknowledged that the terminology was helpful in ascertaining how the Trust should be treated and the duties of the Trustee.

The Z Trust ruling is helpful, however there remain problems to be overcome. There is no insolvency regime in place in respect of Trusts and therefore, no clear remedy for creditors and other stakeholders. This lack of regime results in additional cost. Furthermore, there is difficulty finding a replacement for the incumbent Trustee in these situations.

Which sectors would you say are faced with insolvency and restructuring proceedings more than others in Guernsey?

As expected of an International Finance Centre, we deal with a significant volume of solvent restructuring matters in relation to Trust and Fund structures in Guernsey. These structures have typically come to the end of their useful life and are therefore being wound down. The structures often include entities in various jurisdictions such as Luxembourg, Cayman, BVI and Bahamas, as well as the UK and therefore, we work closely with our international Grant Thornton colleagues. We also work very closely with our tax colleagues in relation to these matters as decisions are often driven by tax considerations.

Do you see any need for legislative change regarding insolvency in Guernsey?

Guernsey is currently embarking on a reform of its commercial and personal insolvency legislation. I was engaged in 2016 by the States of Guernsey to assist with the changes and to provide recommendations on the proposed law reform.

The first phase of the reform is anticipated to include the introduction of insolvency rules; a requirement for independent office holders in an insolvent voluntary winding up; greater consultation with creditors in an insolvent winding up; and greater powers for office holders to obtain information from directors and officers.

These changes will make the insolvency regime far more robust and will enhance Guernsey’s reputation as a safe place to do business.

You have worked on numerous high profile cases in the Channel Islands and the UK - what has been your flagship piece of work in recent years and how did you apply particular thought leadership to this scenario? (94)

We continue to be busy with regulatory and insolvency investigations in the Channel Islands. Our clients may include Trust or underlying entities that have been the victim of fraud; or beneficiaries and investors seeking compensation.

Our forensic investigation work may include isolating and quantifying the fraud, interviewing suspects and witnesses, gathering and preserving digital and other evidence and working with the legal teams to pursue prosecution.

Our in-house Business Advisory and Compliance teams also assist clients with putting processes and safeguards in place to reduce the risk of fraud occurring in the first place.

As a thought leader in this segment, how are you developing new strategies and ways to help your clients?

 As a member of the Association of Restructuring and Insolvency Experts (ARIES) Legal and Regulatory Committee, I have been assisting with the implementation of Guernsey Insolvency Practice Statements (GIPS). These will help to provide best practice guidance to practitioners in Guernsey, in advance of the law reform. The GIPS will cover such practical areas as conducting investigations, reporting on director conduct, the holding of creditors’ meetings and pre-packaged sales of business through Administration.

The GIPS are expected to be released within the following two months. ARIES has also begun drafting Jersey Insolvency Practice Statements (JIPS) to offer similar guidance to Jersey practitioners.