The fear of insolvency haunts many small retailers struggling with competition and the enormous complexities of modern trading. Colin Haig identifies the danger signs and where to go for help Times can be tough for independent retailers, who must fight to compete with the growing might of the big multiple chains. And it's a sad fact of life that some are now facing insolvency. A company is insolvent when it can't pay its debts as they fall due, or where its assets are insufficient to meet its liabilities and the costs of winding up. Debts of just £750 for a private individual and £1,000 for a company are enough for creditors to pounce. In a solvent company, directors aim to safeguard shareholder interests. In an insolvent situation, the creditors' position becomes paramount and directors have to manage the company for their benefit. While the government, banks and insolvency profession prefer to turn a business around rather than close it, the first step towards turnaround must be taken by management. Unfortunately, management fear is the biggest obstacle to rescue in more than 90% of cases, yet neglecting to properly deal with company affairs can lead to a director being disqualified for up to 15 years. Management failings during this period give a government-appointed insolvency practitioner the chance to make full use of the remedies available under the Insolvency Act against the directors. There are 10 key warning signs which grocery retailers should be aware of; if six or more apply, they should get professional help: - Is monthly, quarterly and year-on-year turnover down? - Has footfall dropped? - Has the customer base changed and purchasing patterns or average spend dropped? - Are margins consistently declining? - Is the trading format old fashioned? - Are there outstanding accounts and/or tax or VAT older than six months? - Is there insufficient working capital? - Have any suppliers re-negotiated or terminated their contracts or initiated court action? - Are many suppliers used to increase available credit? - Are invoices unpaid until delivery of a new order is required? Business recovery professionals can rescue troubled grocery retailers through a variety of legal and informal procedures. In tandem with the clearing banks and other organisations they re-structure debt, streamline operations and do whatever is necessary to keep the business going while it trades out of trouble, is re-financed or sold to, or merged with, another firm. In most cases, the core objective is to recover as much of the money owed to creditors as possible and this is often best achieved by finding a solution which enables the business to continue trading. Once a company or an individual has become insolvent, several courses of action are available. To briefly sum up the options: Administration ­ court-led protection often used to facilitate a moratorium by creditors; a company voluntary arrangement (CVA) ­ a formal contract between company and creditors that is supervised by a licensed insolvency practitioner; receivership ­ involves the appointment of a receiver under a charge to recover a secured creditor's funding, usually a bank (there has been a strong hint from the government that receiverships may soon be a thing of the past); liquidation ­ means winding up a company voluntarily or through the courts; dissolution ­ a company is struck from the register. Grocery retailers experiencing tough trading conditions might want to explore a company voluntary arrangement, or CVA. This procedure was introduced by the 1986 Insolvency Act and can allow a business to continue to trade, provided creditors agree. The ideal outcome is a business that returns to profitability. Under a CVA a company is re-organised so it can pay creditors through mechanisms like delayed or reduced debt payments, capital restructuring or a disposal of non-core assets. A CVA must be agreed by creditors and shareholders at separate meetings and controlled by a licensed insolvency practitioner. While the economy is currently buoyant, independent grocery retailers will experience difficult trading conditions over the next few years as the industry changes to meet changing consumer needs. The best way to avert failure is to seek professional advice and take action as soon as trading problems become apparent. - Colin Haig is national director for business recovery at Baker Tilly Financial Services. {{MANAGEMENT FEATURE }}