What will the administrators do?

Came aross this really informative article on the wonderful BBC News, as usual well writtten and will answer a few questions, full artile is here.

The insolvencies of Woolworths and MFI present their newly appointed administrators with some tough tasks.

Dozens of staff from the two insolvency firms concerned are busily putting themselves in the shoes of the former management.

Their task is to try to retrieve something for the creditors - the taxman, banks, other lenders, and possibly even the unsecured creditors like suppliers and customers.
All that means dealing with staff, including making some redundant, running or shutting stores as appropriate, moving stock around, and assessing the levels of debts and the value of assets in the companies.

'On the hoof'

The administrators will be talking to creditors, suppliers, customers and, most importantly, trying to find a buyer for all or parts of the now insolvent businesses.

If you can't get enough information I'm afraid the only answer is to close everything down
Christopher Morris, former liquidator to collapsed BCCI bank
One of the UK's leading insolvency experts, Christopher Morris of Begbies Traynor, says all this can, not surprisingly, be very difficult to do.
"Sometimes you are lucky enough to have had a bit of a lead in and some time to plan the administration," he says.
"Other times the problems of the company come to a head very quickly - you go in with a zero knowledge base."

In some cases, plans have to made up on the hoof.
"Information gathering can be very difficult where you have low staff morale," Mr Morris says.
"You can get stocks disappearing, other company assets disappearing; you may get little co-operation from the management and if you can't get enough information I'm afraid the only answer is to close everything down," he warns.

Generating cash

Closing stores before Christmas when many make almost all their annual profit might turn out to be a mistake.

Stores may stay open to generate cash
However the administrators take over all the powers the now ex-directors had.
Bank accounts will be frozen by the creditor banks so new ones will be opened.

And, if possible, goods will continue to be sold while a possible rescue plan is formulated.

As Christopher Morris points out that will generate some cash for the firms in the short term.
"The one advantage when you go in as administrator is you don't have to pay past debts, or very few of them," he says.
"So all the suppliers would not get paid yet, so you have that cash advantage with money coming in from the sale of stock without having necessarily to make the matching payments to suppliers."

That money can then be used to fund trading for the time being.

Rescue or closure? The legal emphasis these days during an administration is on formulating a rescue plan.
Someone might find they have a shop but no stock, so there is no point in keeping it open

A key task for an administrator will be to identify the good (profitable) parts of a business and the bad (unprofitable) parts.

The aim is to find a buyer for the good bits who will then, hopefully, keep them trading.
The rest, typically, will be closed down and be sold for whatever residual value the remaining assets still have.

Making those assessments is not easy and can rely on the advice and experience of the previous management.

They may not be willing to provide this, which can make the whole process a long one.
But if an administrator thinks the situation is hopeless then immediate closure is entirely possible.
"If the thing is a goner it's a goner," Mr Morris warns.
"Sometimes under 'reservation of title' a supplier can come and simply take back their goods, so someone might find they have a shop but no stock, so there is no point in keeping it open."


With Christmas coming up, the administrators at Woolies and MFI may try to trade though the next month or so, turning as much stock into cash, moving stock from closed branches and depots to the ones that are still trading.
What about people who have paid for goods on deposit?

They will be entitled to collect their goods it they are in their name in the back of a shop or store, provided they pay up the full price.

But if the goods are not personally identified or have not arrived from a supplier, they may lose their money and become a creditor, or have some recourse to their credit card company.
A lack of trade insurance for suppliers has been one development triggering the insolvency of the two groups.

But Christopher Morris points out that that is not such a problem for administrators who wish to continue trading.
"If you supply an administrator with goods he is bound to pay you, so the question of credit insurance does not arise there," he points out.
"Liabilities incurred by administrators after their appointment take priority over everything else, so if you supply an order from an administrator then in all circumstances you will get paid."

Time wasters

Keeping an insolvent business trading is a very difficult task.
There may be endless things to deal with as regards the premises

"I don't envy them, it's a tough job, they will be working round the clock, very large numbers of people will be required at the start at least, one problem after another will be emergi
Morris explains.
Among them are time wasters.
"One problem you always get is inquisitive parties who purport to be interested in buying the business but who have not got a real interest," he says.
"You have to sort them out and deal with people who have the real backing and willingness to take on a difficult situation."

In some cases, would-be buyers have been aware of the situation and have been eyeing up the insolvent firm for a while.
In what is known as a "pre-packed" deal the businesses can be declared insolvent and then sold to the new owners in one fell swoop.
The publicity may also flush out interested buyers.


Among the complicating factors can be owners of stores or depots; landlords who have leased the properties to the now bust companies.

There may be arrears of rent and unpaid suppliers of gas and electricity.
"There may be endless things to deal with as regards the premises," Morris says.

So what does he think is likely to happen to Woolies and MFI?
"I expect to see a limited period of trading, the closure of some branches, and hopefully a disposal as quickly as possible."

The unfortunate fact though is that in the middle of a severe credit crunch, potential buyers may find it impossible to borrow the money to go through with the deals, even if they think they are potentially profitable.


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