Live Session 3 - Trading & Selling the Business

Question 1

What is the administrators primary duty

Answer 1

To rescue company as a going concern. This will require administrator to trade the business.

Question 2

What is an admin receivers primary duty

Answer 2

To realise assets to meet appointing charge holders claim. Best way to achieve this may be to trade and sell part of all of the business.

Question 3

What is the biggest risk to office holder of trading a business

Answer 3

That the actual outcome for creditors will be worse than if there had been no trading.

Question to ask: Does trading contribute to achievement of objective?

Question 4

What are some considerations when deciding to trade in short term - up to 14 days after appointment

Answer 4

Office holder may decide to trade to:

1. Complete Work in Progress
2. Protect outstanding book debts - customers will be more likely to pay if continuing to receive supply.
3. Provide breathing space to allow office holders to consider options & explore going concern sale and trade until sale completes
4. Short term trading is generally low risk, completing existing contracts rather than entering new ones.

In exam, always consider trading in the short term

Question 5

What are some considerations when deciding to trade for longer term - beyond 14 days

Answer 5

1. Remember that administrator owes a duty to all creditors and must ensure that creditors are not prejudiced by decision to trade
2. Admin Receiver has a duty not to worsen the position of preferential creditors by continuing to trade.

Question 6

What are some advantages of deciding to trade beyond 14 days

Answer 6

1. Continued trading facilitates a going concern sale which should generate a better return for creditors than a forced sale
2. If trading is profitable it will enhance floating charge realisations over and above increase in asset realisations to be obtained from a going concern sale
3. Reduces bad publicity caused by job losses - particularly for admin receiver where bank may be to blame for closing company.
4. More chance of saving jobs if continue to trade

Question 7

What are some disadvantages of deciding to trade beyond 14 days

Answer 7

1. Longer trading period increases chance of office holder breaching duties, to bank, prefs, unsecureds
2. May not achieve purpose of admin and risk lesser return than in winding up
3. Risk of personal liability increases - must always remember to state in any correspondence that admin is agent of the company acting without personal liability - if don’t, could be personally liable.
4. Risk of duress creditors seeking to enforce rights
5. Liquidation risk - disgruntled shareholder may apply for liquidation and terminate administration

Question 8

What practical issues would you consider if deciding to trade

Answer 8

1. Will stat purpose be achieved?
2. Is appropriate insurance coverage in place
3. Who do you need support from to sustain trading - landlord, ROT creditors?
4. Do you have funding - bank account/ overdraft/ secured lender extend creditor to office holder?
5. Employee health and safety
6. Supplier support
7. Customer support & commitments
8. Competitive landscape, can customers easily go elsewhere?
9. Key supplies - utilities, internet, tech support?
10. Stock take of day 1 inventories - assess level of stock held vs needs
11. Employees - key staff, retention issues
12. Stakeholder communications
13. If regulated, is regulator approval required?

Question 9

What controls would you put in place to manage trading risks

Answer 9

1. Access/ security controls
2. IP office authorises all transactions to retain control
3. IP sign entry into any new contracts
4. Haulage firms who may be owed money can hold to ransom - use delivery firm/ drivers who aren’t owed money
5. Obtain/ change security codes/ passwords for computers, bank accounts, restricted areas and files etc.
6. Health and safety monitoring and risk assessment
7. Insurance - keep under review to ensure adequacy
8. Prepare cash flow forecasting to ensure trading makes sense rather than losing money
9. IP Staff on site to monitor activity
10. Manager IP risk - ensure contracts in name of company rather than office holder - IP is agent of company without personal liability
11. Brief company staff of controls and expectations
12. Agreements with utility providers
13. Agreements with leased creditors - give back any unnecessary leased assets
14. Credit controls for customers - consider amending credit terms.