by Paul Grundy Senior Associate Solicitor, Restructuring & Insolvency - PowerPoint Presentation

1. by Paul GrundySenior Associate Solicitor, Restructuring & InsolvencyHarrison Clark Rickerbys SolicitorsInsolvency in the Real Estate and Construction Industry

2. Statistics and trends 2017The underlying number of company insolvencies rose by 4.2% compared to 201674.6% (12,861) of total insolvencies were creditor voluntary liquidationsCompulsory liquidations, 16.2%Administrations, 7.5%Company voluntary arrangements, 1.7%Q1 2018 figures to be published shortlySource: Insolvency Service

3. Insolvencies by sectorNew company insolvencies in England and Wales by broad industry sector, 12 months ending Q2 2017The number of construction sector insolvencies, 2,633, which saw an increase of 0.5% compared to previous 12 monthsRetail and hospitality also high on the list of casualties. These figures do not take into account the recent examples of company insolvencies we have seen including Monarch, Carillion, Toys ‘r’ Us, Maplin and many others.Source: Insolvency Service

4. Common insolvency processes under the Insolvency Act 1986 and Insolvency (England & Wales) Rules 2016 CorporateAdministrationCompulsory liquidationVoluntary liquidationCompany voluntary arrangements (CVA)Administrative ReceivershipsPersonalBankruptcyIndividual voluntary arrangements (IVA)Debt relief order (DRO)

5. A brief summary…Administration – the process by which a licensed insolvency practitioner is appointed to manage the affairs of a company's, including its business and property for the benefit of the creditors, to achieve one of more of the statutory objectives.Company voluntary arrangements (CVAs) are a mechanism for business rescue. They are a means of repaying creditors some or all of what they are owed. Once approved by 75% or more of creditors, the arrangement is binding on all creditors. CVAs are supervised by licensed insolvency practitioners. Administrative receivership is where a creditor with a floating charge (often a bank) appoints a licensed insolvency practitioner to recover the money it is owed. Prior to 2000, receivership appointments also include other, non-insolvency, procedures, for example under the Law of Property Act 1925.

6. Administrations in a bit more detail…Schedule B1 of the Insolvency Act 1986Statutory purpose:rescue as a going concern, orachieving a better result for the company's creditors as a whole, orrealising property in order to make a distribution to one or more secured or preferential creditors.Appointment of administrators:Court route – paragraph 10Out of court – paragraph 22 and14Directors’ paragraph 22 appointment if no petition or administration application extantNotice of intention – 5 business days’ noticeConsent of QFCH requiredAppointment within 10 business daysPersons appointing Administrators under a QFCH (paragraph 14) must give 2 business days’ notice to any prior ranking QFCHMoratorium applies (including interim moratorium) – paragraphs 43 and 44

7. Administrations in a bit more detail… (2)Statement of the affairs of the company to be provided by the relevant persons to the administrator – paragraph 47Administrator shall make (and send out) a statement setting out proposals for achieving the purpose of administration – paragraph 49Creditors must be invited to vote on the proposal within 10 weeks – paragraph 51On 6 April 2017 the Small Business Enterprise and Employment Act 2015 (“SBEE”) came into force which introduced the ability to hold a decision procedure and moved away from physical meetingsDeemed consent procedure – proposal approved unless objectiosn from 10% of creditors

8. CVAs in a bit more detail…The directors work with an Insolvency Practitioner to prepare a proposal – r.2.3 IR 2016Company Directors’ Statement of Affairs – r.2.6 Nominee’s report – r.2.9The company must consider proposal within 28 days of filing of Nominee’s report – r 2.26Creditors’ decision procedure not more than 28 days of filing of Nominee’s report nor less than 14 days after notice of meeting – r2.27Proposal is passed by 75% majority of creditors (and 50% unconnected creditors also do not oppose)

9. CVAs in a bit more detail…(2)AdvantagesIf approved the proposal binds all unsecured creditorsManagement retains control of business subject to supervision by IP to protect company assetsCase law on enforcement of adjudication awards by a company in CVA have determined that the mere existence of a CVA does not automatically mean that the successful party in an adjudication would be unable to repay any sums paid to it such that a stay of execution should be ordered - Westshield Limited v David and Lisa Whitehouse [2013] 3576 EWHC (TCC); Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC) DisadvantageNo automatic moratorium and only available in limited circumstancesSmall companies may apply for moratorium if they meet 2 (out of 3) criteriaCVA may be challenged within 28 days on grounds of material irregularity or unfair prejudiceSupervisor to give notice once CVA fully implemented within 28 days – r.2.44Practical tips – Oakrock Ltd v Travelodge Hotels Ltd and others [2015] EWHC 30 (TCC)

10. What happened to Carillion?“Carillion went into compulsory liquidation rather than administration because it had no real assets left to sell. It had contracts, but they were either too complex or insufficiently valuable for the banks to lend against”* Parliamentary research briefing Wednesday, March 14, 2018

11. Warning signs Carillion PlcProfit warning 10 July 2017; profits to be adversely affected by c.£845 millionSparked by an enhanced review of the group’s material contracts by the Board following deterioration in cash flow from contracts, as part of the new Group Finance Director’s wider balance sheet reviewFrom December 2009 to January 2018, the total owed by Carillion in loans increased from £242 million to an estimated £1.3 billionTotal owed within a year to unspecified ‘other creditors’ went from £212 million in 2009 to £761 million by the end of 2016Little investment in tangible assets with borrowingFrom 2009 to 2016 Carillion paid out £554 million in dividends, ¾ of the cash it made from operations.Carillion’s half-year financial statements dated 29 September 2017 revealed a total hit to the company’s worth of £1.2 billion HCR has advised subcontractors affected by Carillion’s insolvency including in relation to various contractual and insolvency related issues

12. Countrywide Farmers Plc – In AdministrationAdministrators were appointed on 7th March 2018Accounts to the end of November 2016 reported operating losses of £9.9m and total losses of £19.9m, after a revaluation of its pension schemeGroup revenue fell £35.3mThe group had undergone several mergers, acquisitions and sales in the previous years from 2014 including sale of the cereal seed business On 1 March 2018 it sold its LPG divisionCompetition and Markets Authority (CMA) blocked a proposed sale of the retail business to Mole Valley Farmers amid concerns of a lack of competition in certain geographical areasHCR advised [the company and Administrators] regarding security reviews in relation to existing security arrangements

13. Flights of fancy - MonarchMonarch Airlines Limited and several other associated entities entered Administration on 2 October 2017The critical point came when the airline came to try to renew its ATOL licence and could not demonstrate to the Civil Aviation Authority sufficient funding and liquidity to keep trading for a further 12 months.Re-financed in 2016 “UK airline Monarch has settled worries over its immediate future by agreeing a £165m investment from Greybull Capital” *BBC News article, 12 October 2016Monarch’s demise was blamed on several factors, including:the fall in the value of the poundincreased fuel costs and handling chargesterrorism – leading to the closure of Sharm El Sheikh, and the collapse of the Tunisian and Turkish travel marketsUltimately an ever decreasing profit margin as a result.HCR acted for a supplier of landing gear/equipment to Monarch in respect of its rights to retention of title and recovery of such assets from third parties/bailees.

14. With market conditions still tough and the uncertainty created by Brexit still fresh in the minds of management and business owners it is inevitable that there will be further insolvencies.We expect further focus in coming months on:Construction industry – as Carillion impact cascades down the supply chain to sub contractors. Industry also operates on small profit margins meaning many contractors are one or two bad debts away from an insolvency event. Rife with late payers and those who consistently push payment days to sub contractors as far as possible.Social care sector – a squeeze on already the already challenging regulatory climate, within which care homes must operate, following the Employment Appeal Tribunal ruling and the implementation of national minimum wage for sleep-in carers, backdated for up to 6 years.Retail – driven by the continued growth of online retailers offering competition in the market with lower overheads. Competition in popular locations for prime real estate keeps rents high for high street retailers further reducing profits and hampering their ability to invest heavily in innovation and keeping up with emerging fashions and trends to avoid getting left behind (as was the case with Woolworths and BHS). Time will tell if changes to date privacy under GDPR set to come in on 25th May 2018 will redress any balance with online retailers having to convince consumers their data is safe following scandals like Facebook/Cambridge Analytica.

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