Strategic rescue on the high street
A number of household names have found themselves in financial trouble lately. The food sector hasn't escaped this trend – not least Jamie’s Italian, Byron and Prezzo to name a few. Following on from our article on "The Fall in Italian Restaurants and The Rise of CVA", this article focuses on some of the options available to restaurants (and other businesses) in difficulties.
So, what's happened lately?
In July 2018 the well known Gaucho chain went into administration, with its sister chain - Cau - closing all of its locations. Similarly to the Jamie’s Italian chain, Gaucho is now finalising a company voluntary arrangement (“CVA”) with its creditors, coupled with a sale to a separate company to try and conclude its administration and rescue its business.
Why administration and then a CVA?
In its crude form, a CVA is a statutory agreement approved by 75% of a company's creditors, meaning all creditors compromise their debts, and the business continues. Administration provides a period of protection to the company while it tries to rescue itself, but this usually results in the company selling its business. So, why did Gaucho go into administration before proposing a CVA?
Administration is a mechanism that enables a troubled company to try and trade back to financial health, or otherwise preserve the value of, and sell, its assets in an orderly manner. Administrators can be appointed by directors, shareholders or creditors of the company.
The key advantage of administration is when notice of intention to appoint administrators is filed, which freezes the creditors’ ability to enforce their claims against the company, known as a moratorium. This gives the company breathing space whilst it tries to rescue itself. The company must have a genuine intention to appoint administrators before it can use this mechanism, failing which it will be an abuse of process.
A moratorium allows the company and its administrators a period of time when the company’s assets are safeguarded and they can assess the company’s position fully. It then allows them, where appropriate, to put together a well planned and formulated CVA that will result in maximising the return to creditors and enable the company to save its business.
How can we help
As evidenced by Jamie’s Italian, Byron, Prezzo and Gaucho, many food and drink businesses are struggling in the current climate. Whether it be as a result of new legislation or regulation (e.g. sugar tax on drinks), shortage of staff, the rise of food delivery services, online shopping reducing foot traffic or a weak pound sterling as a result of impending Brexit.
The key point here is that early strategic planning is crucial. The earlier you identify the issues, the more options you have to address them. That is more than just knowing your options and duties; it means understanding their practical effects and the likely outcomes of each.
Financial distress is difficult for all stakeholders and can be overwhelming. Our restructuring and recovery team understand each stakeholder's perspective and work with them to provide commercially sensible advice.