A twelve-part blog series outlining how to save, turnaround, and grow, your struggling or failing professional client service consultancy, architects practice, design studio, marketing communications (marcomms), PR, digital or creative agency business.
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Total Business Turnaround
Part 06 | Legal Issues
Like finance, it is important for you to have some grounding in legalities of your business and industry and the regulatory environment in which you operate. We will look at legal frameworks, contracts, key laws and regulations related to your business and its continuity. We will also examine your obligations as an employer, a director, and as an individual. This is not an exhaustive summary, nor should it be taken as legal advice.
This is simply an overview of the legal issues that affected our business throughout our restructuring, offered as a guide to get you started. This summary is from a British business practitioner's perspective and though the principles discussed will apply almost anywhere, nothing here should be taken as actionable advice in any way. You are strongly advised to seek your own legal advice throughout any restructuring process.
The Insolvency Practitioner Process
From the moment you officially go into liquidation or administration, you will be operating under license for a period of 2 to 3 weeks until the appointment of the insolvency practitioner. You will be required to sign an agreement prepared by your IP to legally operate the assets of your business and trade under the same name. With this agreement you are effectively licensed to operate you old business until the IP is appointed and the purchase agreement for the business is completed.
A Statement of Affairs will be summarised and compiled by your IP using all of the accounting information you have available. This statement will outline how much you owe your creditors and discuss why you are insolvent. You need to be prepared to write a one page summary statement that outlines details of the immediate 12 – 24 months leading up to your current insolvent position.
As part of your restructuring, you will have to buy back your business under a purchase agreement. When you are working out a purchase of this sort, it is not uncommon to pay 75% of the value of most items. The rest are marked at book value while goodwill and obligations met are up for negotiation.
As we mentioned earlier, because you’re going to be paying for it over the next 12-24 months, it is always in your interest to argue—and prove your case—for a lower valuation of the business. Plan your negotiations carefully and don't leave them until the last minute. Doing so will probably keep you from getting the best price. See the Team Section for an outline of the valuation process.
TUPE – Transfer of Undertakings (Protection of Employment)
The purpose of TUPE – Transfer of Undertakings (Protection of Employment) – regulations is to protect employees if the business by which they are employed changes hands. Its effect is to move employees, and any liabilities associated with them, from the old employer to the new employer. TUPE applies every day to an enormous number of different business transactions and it is essential that employers of all sizes understand what employment liabilities can arise from its action.
S216 and the Reuse of Your Company Name
Section 216 of the Insolvency Act of 1986 restricts a phoenix company or a successor business from using a similar name or trading style to that of an insolvent company undergoing liquidation. This applies if the directors from the previous business are involved in the management of the successor company in any way, even if they acting as shadow directors. That is not to say it is impossible for you to use your old company name, you just need to carefully follow the law.
Rent and Landlords
One of the major issues you will face during your restructuring will be what to do about the physical place where you conduct your business. Along with the insolvency practitioner, your creditors and your clients, you have a landlord to deal with. Some of the things you will need to consider include discontinuing your lease, dealing with the managing agent, lease assignments, repayment plans, deposits and the possibility of having to relocate.
Leases and Licenses
On the whole, lease and license payments are fixed monthly expenses and regardless of whether you are restructuring your business or not, its beneficial to try and reduce your payments or remove them from your monthly obligations all together. This includes rental and lease finance agreements, software licenses, equipment redundancy, personal guarantees and, as always, communications.
Liquidity and Insolvency
Liquidity translates into cash, either cash on hand or in assets that can be quickly and easily converted into cash. Unless you have employees who work for filched office supplies, they are going to want cash. The same goes for your suppliers, your creditors, your solicitor, your bank—essentially everyone involved with your business and the restructure. To ensure you do not fall into insolvency, you must pay particular attention to the following:
Issue invoices and chase payments promptly and regularly.
Reduce your overhead and expenses aggressively.
Seek the maximum percentage draw-down achievable with your Sales Financing Company. You don’t have to always draw-down the maximum but having the facility available can ease your cash flow when things gets tight.
Ensure that all documentation is in place so invoice payments are not unnecessarily delayed, disputed, ignored or cancelled.
Do not use suppliers and creditors unless they are absolutely critical to your business.
Ensure that you have up-to-the minute management account information so you can be sure of where you stand vis-a-vis your solvency.
Negotiate and try to reach an agreement with your suppliers and creditors if you foresee a difficult period coming.
Give notice of reduced working weeks to staff.
Try to negotiate discounts and payment reductions on your leases and rent payments.
Attempt to obtain payment holidays from all of your creditors.
This means the continuation of your business from a clerical perspective. Involving payments that must be maintained throughout the process, otherwise key benefits will be lost and that will impact staff morale, cash flow and business continuity. These key areas can either be transferred or renewed with new companies at more competitive rates, but you must ensure that any benefits accrued are taken on by any new supplier. These include insurance, medical coverage, and pension contributions.