Rescue, Recovery, and Closure Options for Retail Businesses
High street retail, especially, has faced financial and operational problems for a while. In recent years, many well-known high-street brands have closed down or entered formal insolvency processes like administration and Company Voluntary Arrangements (CVAs) due to increasing pressure.
The gap between high street stores and their online competitors has been growing for some time. In recent years, more consumers have shifted to online shopping, intensifying the gap. This puts pressure on retailers as the cost of running physical stores rises while trade decreases.
Winding up your retail business through liquidation
If your retail business is facing a decline, you might be questioning its future. If your retail store is insolvent or at risk of financial trouble, placing the company into liquidation could be the best course of action.
However, liquidation should not be taken lightly. It’s a significant decision and usually irreversible without substantial expenses to reinstate the company.
An insolvent company can face liquidation either through legal action from dissatisfied creditors or at the director’s request.
Court-ordered liquidation is termed Compulsory Liquidation, while director-initiated liquidation occurs through a process called Creditors’ Voluntary Liquidation (CVL). Although it might seem counter-intuitive for a director to liquidate their own company, it is often the most suitable course of action.
Once a company becomes insolvent, its directors are legally obliged to prioritise the interests of the company’s outstanding creditors over those of the company and its shareholders/directors. This entails ensuring that creditors’ positions are not worsened and their losses are not increased.
In certain instances, an insolvent retail business may need to shut down immediately to safeguard the value of the business and its stock. However, in other cases, the store may be permitted to keep trading if it’s believed to benefit its creditors.
Navigating insolvency in retail is highly intricate, and the consequences of not fulfilling your duties can be serious. If your retail business is insolvent, it’s crucial to seek guidance from a licensed insolvency practitioner as a priority.
An insolvency practitioner can offer an impartial assessment of your retail company, its financial status, and future prospects. They can determine whether liquidation is an appropriate course of action.
Although liquidation might not be a preferred consideration, for retailers facing debts at the end, it can be the most practical option at the end of the road. Opting for a CVL to liquidate your company ensures fair treatment for all creditors.
Your staff can claim redundancy, and any outstanding borrowing will be forgiven unless a personal guarantee has been previously provided.
How can I Rescue My Retail Business?
Many struggling retail businesses, especially those facing financial challenges due to the ongoing coronavirus crisis, have options for saving the company and restoring its operations.
Every company is unique and confronts its own set of challenges, so it’s crucial to treat each company as the individual entity it is when crafting a rescue plan. This particularly applies when dealing with retail businesses, which often have complex structures, both online and offline operations, and numerous stores, branches, or franchises.
If your retail business has suffered a decline in profits, there may be an opportunity to rescue the business, or at least part of it, through operational and financial restructuring. For retailers with multiple stores, simplifying the business could reveal ways to streamline operations and enhance efficiency.
Identifying unprofitable areas that could be phased out allows for funds and resources to be redirected to more lucrative parts of the business. This immediate action can enhance cash flow, boost profitability, and safeguard the remainder of the company from the impact of underperforming segments.
Retail businesses facing creditor arrears might contemplate a Company Voluntary Arrangement (CVA). This may involve engaging in formal negotiations with creditors, including landlords and HMRC, to decrease monthly repayments to a more manageable and sustainable level.
This allows financially troubled companies to initiate discussions to renegotiate lengthy and expensive lease agreements with landlords. Moreover, there’s a possibility of having a portion of their debt forgiven by trade creditors.
For a CVA to proceed, a minimum of 75% (by value) of the company’s creditors must consent to the proposals. Since a CVA depends on the company’s continued trading throughout the agreement, typically lasting 3-5 years, creditors must believe in the long-term viability of the retail business.
Therefore, CVAs are only appropriate for retailers whose precarious financial state can be reversed.
Your insolvency practitioner will evaluate your company’s suitability for a CVA before drafting and presenting a proposal to creditors. If the insolvency practitioner deems that a CVA may not be accepted, they will explore alternative options that could potentially rescue your business.
In circumstances where your retail business faces litigation threats from creditors, one option may involve placing the company into administration.
Administration grants the company a moratorium, shielding it from legal actions, including threats of winding up petitions from creditors that could lead to compulsory liquidation.