Just 10% of businesses going into Administration successfully come through the process, according to new research. If Pre-Pack or Trading Administration routes, channels which are gaining popularity, are included in the analysis, then the outlook looks better – but with fewer than a third of Administrations resulting in a rescue of the business as a going concern, the intervention’s track record still remains ineffective.
Every year on average more than more than 10,000 business in the UK enter into insolvency. The majority of those companies are closed down by going into (compulsory/voluntary) liquidation, yet another share, estimated to be between 10% and 20%, go into Administration. To gain insight in the effectiveness of Administrations in the UK, two parties, Opus Restructuring and Company Watch*, joined forces to analyse the performance of 4,500+ companies in England and Wales, which filed notices of the appointment of Administrators in the five years up to August 2016.
The researchers found that out of the 2,607 Administrations completed, 2,344 (90%) of the distressed companies resulted in either being liquidated or being dissolved without going through a liquidation. High profile failures have included the likes of Comet, Blockbuster and La Senza.
In just 263 (10%) of cases, the company exited Administration and remains active. These companies tend to be focussed in the hotel and property development sectors. Seventy five of the surviving firms used the successful implementation of a Company Voluntary Arrangement (CVA) as the exit route. A significant number of these are football clubs, such as Portsmouth, Hearts and Dunfermline Athletic.
“Whilst our analysis shows that 90% of completed Administrations end either in Liquidation or Dissolution, it may be that this masks effective business rescues via the Pre-Pack and Trading Administration routes”, says Nick Hood, Business Risk Adviser at Opus Restructuring. According to his assessment, it is likely that up to 513 of the Administrations ending in Liquidation or Dissolution may have involved the rescue and long term survival of the business through a Pre-Pack sale or a sale following a period of trading (a Trading Administration).
Applying this findings to the research shows that, of the 2,344 apparently unsuccessful Administrations, 586 may include Pre-Packs, of which 437 (75%) would have produced a rescue of the business via a transfer to a new owner, which survived at least three years. In addition, there may have been 94 Trading Administration business sales, of which 76 (80%) would have produced a rescue of the business via a transfer to a new owner, which survived at least three years.
“If these are added to the known successes, the total number of positive outcomes rises to 776 and the success rate for Administrations from 10% to 30%”, says Hood. He calls a business rescue percentage of 30% “disappointing”, and one which “reflects the endemic ostrich-like behaviour of struggling entrepreneurs who wait far too long before admitting they have problems.”
He believes that a lot more troubled businesses could be rescued if they sought much earlier help from specialist advisers, allowing the business to leverage a much broader range of options. “By not soldiering on as troubles accumulate, companies that get help stand a far better chance of refinancing or restructuring, saving more jobs and achieving higher and quicker recoveries for unsecured creditors.”
Companies still in Administration
Out of the 1,960 companies still in Administration, 757 (39%) had been in the process for more than a year and 301 (15%) had been in Administration for more than two years. Property companies feature heavily among these, as well as some highly complex financial services businesses, such as MF Global and the failed international law firm, Dewey & Leboeuf.
The number is surprisingly high, says Hood, as the process is lasting longer than the one year period contemplated by the relevant insolvency legislation.
* Opus is a boutique restructuring and turnaround consultancy. Company Watch is a data platform which rates and predicts the financial health of companies worldwide.