Neil Smyth, partner at Taylor Wessing, explains how insolvency, and the role of the IP, varies according to the nature of the business.

Insolvency legislation applies equally to businesses in all sectors and industries. But what makes the role of an insolvency practitioner (IP) or insolvency solicitor most interesting, is how we apply that legislation to the various businesses that we encounter.

Here are some of the issues that insolvent businesses in 6 different sectors need to bear in mind.

Leisure

Involvement in a leisure business brings directors and insolvency professionals into contact with a range of legislation, covering such issues as licensing and health and safety. Licensing legislation requires the IP to apply to transfer or dispose of the licence within 28 days, and the IP may have to transfer the licence and enter his or her name, with all of the risks, including criminal liability, that this entails.

Health and safety permeates various different industries, and IPs who continue to trade could run the risk of prosecution if that company commits a health and safety offence. Prosecution of an IP has not yet happened, but the Health and Safety Executive (HSE) has recently obtained fines against businesses in insolvency processes to send a message that insolvency will not relieve a company of its duties and obligations.

Transport

If a haulage business becomes insolvent, it has certain obligations to the traffic commissioner to report on its financial affairs. If such a company goes into an insolvency process, and the IP wants to continue to trade the business, the IP must apply to have the business licensed in his or her own name. The IP is therefore taking responsibility for the compliance with the statutory obligations that a business that operates vehicles on the road has.

Hotels

A particular issue that insolvent companies and IPs face in the hotels business is immigration. Hotels, by their nature, often employ low-skilled labour, who may not use English as their first language. A proportion, if not majority, of the workforce is likely to be supplied by agencies on a short-term basis. The directors and IPs need to be sure that all employees are entitled to work in the UK, and do not fall foul of the immigration legislation.

Retail

The landscape of retail, and how consumers shop, has changed, and will continue to do so, due to the growth of online shopping and consumers' changing habits. However, many retailers, particularly those in financial difficulty, have multi-site stores, both out of town and on the high street. This often means large property portfolios and hefty rent bills. 

With rent normally payable quarterly in advance, retailers in financial difficulty and IPs of retail businesses have difficult decisions to make as to whether the company is in a position to pay the rent, and its trading prospects for the following quarter.

The law on payment of rent as an administration expense has changed, after the recent Court of Appeal decision in the Game Station case.  Administrators must now pay rent as an expense (in advance of their own fees and disbursements) on a pay-as-you-go basis. So IPs have to work out the anticipated trading period of a retail administration and whether they can afford to pay the rent, as well as other expenses, such as wages and utilities during that trading period.

Agriculture

Often, in respect of a company in financial difficulty, the decision is made to shut down the business, rather than continue to trade in or outside of an insolvency process. With agricultural businesses involving livestock, however, this is not a simple decision. Livestock must be disposed of humanely, pursuant to legislation, which can be costly and time-consuming.

Sports clubs

In many sectors, directors and IPs may look at using an insolvency process to pre-pack a business by lining up a purchaser and agreeing the sale documents before selling on the first day of an administration. However, some industries, such as sports clubs, have regulations governing how they operate through organisations such as the Football Association. These stipulate what insolvency processes are available.

Also, professional leagues are often structured so that participating clubs must hold a share in the relevant league, which belongs to the company. Any purchaser needs to buy the share, which will usually involve the relevant authority's consent, or use an insolvency process to settle the debts of the existing company's creditors, so that the existing company can be used to trade the club in the future.

So it’s clear that directors and insolvency professionals can face many different issues and challenges, depending on the nature of the business. Despite these differences, what the entities have in common is being in financial difficulty, and having the provisions of the insolvency legislation at their disposal. 

About the author

Neil Smyth is a partner in the restructuring and corporate recovery group at Taylor Wessing, and specialises in all forms of corporate recovery matters. For more information, visit the website, or follow on Twitter @TaylorWessing.