British farmers are facing a growing number of challenges, from rising labour costs and reduced farm payments to climate issues and succession planning complications, and the risks of going out of business as becoming ever more real.
With others on the supply chain and the recent upheaval of international trade adding further complications, the financial challenges that could lead to insolvency are heightening and it is important for farmers to take proactive steps to safeguard for the future.
Jane Henderson, Senior Associate in Thrings’ Restructuring and Insolvency team looks at the key processes to understand and the practical steps you can take.
What is insolvency?
Insolvency is the term given to where a company or individual cannot pay their debts and other financial obligations as they become due, or when their liabilities exceed their assets. This can come in two forms:
Insolvency processes
As with there being multiple forms of insolvency, so too are there processes that businesses can follow depending on their circumstances. These include:
Administration: This involves the appointment of an administrator who will manage the company in financial distress, with the aim of rescuing the business or achieving better returns for creditors than if the company entered liquidation. Sometimes the business will continue to trade in administration, but sometimes the business may be sold quickly. If a supplier enters administration, payment delays and other disruptions are highly likely but, if you are asked to continue supplying a company in administration, you are entitled be paid for doing so. You are entitled to negotiate new trading terms with any successor business.
Liquidation: A company in liquidation ceases trading and the role of a liquidator is to realise assets to pay creditors before taking steps to permanently close the company. If your supplier or customer has entered liquidation, outstanding unsecured debts due to you are unlikely to be paid in full (or perhaps at all). Any sums demanded by a liquidator should be carefully considered.
Company Voluntary Arrangements (CVAs): A CVA is a rescue procedure for limited company and limited liability partnerships (similar regimes exist for individuals and other partnerships). A CVA effectively allows a company to propose and agree repayment terms with creditors whilst continuing to trade. Creditors have an opportunity to review and vote on a proposed CVA before it takes effect and can suggest modification, but if approved by the requisite majority of creditors, the agreed terms will be binding on all creditors.
Bankruptcy & IVA: Bankruptcy applies to individuals (rather than companies) including sole traders and addresses personal debts and assets and indicates that a person is unable to pay their personal debts as they fall due. As with liquidation, unsecured debts are unlikely to be paid in full, but much will depend on the circumstances of each individual case. Individuals may make Individual Voluntary Arrangement proposals with their personal creditors.
Partnerships: The farming sector is one of the few sectors in which traditional partnerships continue in large numbers and the insolvency procedures available to them and there are a mix of corporate-like procedures and personal procedures that can apply including Administration and Liquidation and a PVA, but as partners are personally liable, bankruptcy procedures may also apply to their debts and assets too. Sometimes, discerning what are personal or partnership debts or partnership or personal assets is not straightforward.
Receiverships: Fixed Charge Receivership is a form of enforcement procedure available to secured creditors to appoint receivers over specific assets to realise the income from that asset or sell that asset. Often it does not affect the whole business and often relates to land but in some circumstances, (especially with partnerships) a court may appoint a receiver if there are disputes between the partners also.
Practical steps
Monitor and diversify relationships: It is recommended, as far as possible, that you stay up to date with information relating to the financial health of those you do business with by reviewing payment patterns, reacting to any delays in communication and payment and reviewing any publicly available information (e.g. news reports). Where possible, you should also try to avoid over reliance on any one supplier or customer to mitigate risks. Managing relationships through knowledge is invaluable.
Review and strengthen contracts: Read and use appropriate contractual terms and conditions including retention of title clauses, clear payment terms and appropriate remedies for any breaches can help protect you if issues arise. Negotiate terms or prices to mitigate and control risk where you can. Contracts should be ‘living documents’ that guide what you do and not just to be used when trouble looms.
Threats of procedures: There is often a level of miscommunication about what type of procedures are in use or being considered and it is important to understand which particular procedures are being used or may be used.
Seek advice: Early intervention can make all the difference. If you are concerned that any other party may face financial or insolvency risks, it is important to seek legal advice as soon as possible.
Thrings’ Restructuring and Insolvency lawyers are highly experienced in successfully advising business owners facing financial difficulties, helping them to take a strategic and tailored approach to the challenges they face that best secures the future of the business. Whether you are a company specifically affected, a management team, stakeholder, creditor or insolvency practitioner, the team is well placed to support you at a time when you need it most. To find out more, please get in contact.