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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Voluntary Arrangements - CVAs

Post-Christmas apocalypse for the retail sector?

retail, high street trading,As we head for its most crucial shopping period in the wake of Mothercare and Mamas & Papas collapsing into administration, I make no apologies for revisiting the UK’s retail sector.
Following last month’s Brexit Halloween deadline and with Black Friday, Cyber Monday and Christmas ahead of us retailers have reportedly stockpiled seasonal products earlier than usual but the consumer uncertainty remaining no one knows how much stock will remain unsold in the new year.
The Confederation of British Industry, the country’s leading business lobby group, said retailers’ stock levels compared with the volume of expected sales had risen to the highest point in October since it began compiling retail sales estimates in 1983.
This is against a backdrop of dramatically narrowing profit margins, falling consumer confidence and repeated demands for comprehensive reform of business rates falling on seemingly deaf Government ears.
A new report by the global professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics, has found that store-based profit margins for the top 150 UK.retailers have more than halved in less than a decade – dropping from 8.8 percent as seen in 2009/10 to 4.1 percent in 2017/18.
This, it says, is the result of increasing operating costs, inflexible lease structures and changing shopping habits. Yet, it concludes that there is still demand for the High Street physical retail experience “presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle”.
But with a December 25th Quarter Day deadline for the payment of quarterly rents, cash flow is likely to be tight for many retailers who won’t get much support from landlords.
Indeed, headwinds are building up for retail landlords in the retail sector such as Intu, the shopping centre owner, which has warned that it will have to raise more money from shareholders.  It has said that its rental income has been battered by a wave of controversial retailer restructures, by such retailers as Monsoon and Arcadia, using CVAs (Company Voluntary Arrangements) to negotiate rent reductions.
In addition to rent, rates are also an ongoing problem for retailers. On October 30th the Treasury Committee, a cross-party group of MPs, called for an urgent review of the whole business rates system, saying that it was broken, having outpaced inflation for many years and grown as a share of business taxes, placing an unfair burden on bricks and mortar shops. Not only that, but, it also criticised a backlog of 16,000 appeals against business rate decisions and called for the government’s valuation office to be properly staffed.
This was only the latest in a seemingly endless series of calls for reform, that had come from such bodies as the FSB (Federation of Small Businesses), the British Retail Consortium and others throughout the year, with FSB chairman Mike Cherry warning of a very bleak winter ahead.
With consumer confidence currently at a six-year low according to research by YouGov and the Centre for Economics and Business Research Mr Cherry’s prediction isn’t a surprise.
With an estimated 85,000 jobs having already gone from the retail sector over the last year, and approaching 3,000 more coming after the latest retail closures how likely is it that consumers will rush out and spend during the festive season?
The likelihood of any Government action has, of course, receded into the distance given that politicians are now not sitting, but out on the campaign trail ahead of a General Election on December 12th.
Whether a new government can shift its focus away from the ongoing and ever more tedious Brexit saga and onto more pressing domestic concerns remains a very big question but the party manifestos focus on sectors other than the retail sector which doesn’t bode well for them in the short term.

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Banks, Lenders & Investors Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Proposed HMRC preferential status a blow to financing and restructuring

HMRC preferential status could cause more CVA failures The Government last week published its new draft Finance Bill, which includes the proposal to restore HMRC preferential status as a creditor for distribution in insolvency. This was originally granted in the Insolvency Act 1986 but removed by the Enterprise Act 2002.
In summary, HMRC is currently an unsecured creditor ranking equally with suppliers as trade creditors and unsecured lenders for any pay-out to creditors from an insolvent company. The preference would mean they get paid ahead of unsecured creditors leaving less or nothing for most creditors whose support is necessary when restructuring a company.
There had already been considerable consternation expressed by insolvency practitioners and investors after Chancellor Philip Hammond announced the proposal in the Spring, but it seems the Government has decided to press on making only a light amendment to the effect that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.
The change in HMRC to preferential status will apply to VAT and PAYE including taxes or amounts due to HMRC paid by employees or customers through a deduction by the business for example from wages or prices charged such as PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme deductions.
It will remain an unsecured creditor for other taxes such as corporation tax and employer NIC contributions.
The consultation period for the Bill ends on 5 September 2019 and, not surprisingly, there have already been criticisms of the HMRC preferential status element of the bill, not least as reported in the National Law Review:
“Unfortunately for businesses and lenders, this does not address real concern about the impact of this change on existing facilities and future lending,” it says.
It points out that preferential debts are paid after fixed charges and the expenses of the insolvency but before those lenders holding floating charges and all other unsecured creditors.
Accountancy Age also reports on reactions from the Insolvency trade body R3’s president Duncan Swift, who described the Bill’s publication as “shooting first and asking questions later”.
He said: “This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy.”
The article also includes comments from Andrew Tate, partner and head of restructuring at Kreston Reeves: “The introduction of this in April 2020 will be interesting,” said Kreston Reeves’ Tate. “The banks will have to change the criteria on which they base their lending to businesses in the light of this new threat, but will they also reassess the amounts they have lent to existing customers?

Is HMRC preferential status the death knell for CVAs?

CVAs (Company Voluntary Arrangements) have traditionally been the route whereby unsecured creditors could have some say, and receive an enhanced pay-out, when a business becomes insolvent and seeks to restructure its balance sheet in order to carry on trading and manage its debts.
Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a minority creditor who has lodged a Winding Up Petition (WUP) in the courts.
CVAs generally involve a payment to creditors which must be distributed by creditor ranking where currently HMRC gets paid the same as trade creditors but under the proposals HMRC will be paid first, leaving considerably less for trade creditors whose support is needed as ongoing suppliers.
CVAs have been a valuable insolvency tool for saving struggling retailers, most recently Monsoon/Accessories, Arcadia (owned by Philip Green) and earlier Debenhams, Mothercare, Carpetright and New Look.
But there have been signs of creditors’ disenchantment with the CVA mechanism when used for retail chains, notably from landlords, who stand to lose significant revenue if they agree to reduce their rents as part of the CVA agreement.
Arcadia, in particular, struggled to reach agreement when landlord Intu, owner of several large shopping arcades, said it was not prepared to accept rent cuts averaging 40% across Arcadia Group shops in its centres. In the end the deal was agreed after landlords were promised a share of the profits during the CVA period. This is an example of the flexibility of CVAs and of how they can benefit creditors if a business is to be saved.
It is a dilemma for landlords in particular, but on the whole they seem to have come to the view that some revenue going forwards is better than none, given that there is reducing demand for High Street Retail space not least because of the sky-high business rates and dwindling footfall from shoppers.
However, it is very likely, in my view, that this latest move by the Government to restore HMRC preferential status, could just tip the balance in making the CVA ineffective as a restructuring tool since the lion’s share of available money will be paid to HMRC.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Voluntary Arrangements - CVAs

Why do so many CVAs fail?

failed CVAs? boarded up shopsMy blog earlier in the year (17 May) asked whether the use of CVAs was “a triumph of hope over reality” as they had been increasing noticeably in the High Street retail sector, which has suffered an escalating rate of insolvencies.
A CVA (Company Voluntary Arrangement) is generally used to help a company in financial difficulties by restructuring its balance sheet and reorganising its operations to survive and trade its way out of insolvency. A key aspect of the financial restructuring is reaching agreement with creditors for payment of a lump sum or regular payments over a defined period which is typically three to five years where the payments may be less than the amount owed.
Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a minority creditor who has lodged a Winding Up Petition (WUP) in the courts.
It is too early to say whether this latest crop of retail-related CVAs will succeed or terminate early, but R3, the trade body for the insolvency profession, has published a comprehensive, 90-page, report that examined 552 CVAs started in 2013 to determine success and failure rates and analyse the reasons behind them.
It found that CVA use was “dominated by SMEs, with 514 of the 552 companies reviewed classified as small (or micro) based on Companies House records.” Of these the early termination (generally failure) rate was 65.2%, with early termination in certain sectors dominating: Construction (64.8%), Repair of motor vehicles (73.6%), Manufacturing (66.2%) and Administrative and Support Services (70.5%).
The research also conducted interviews with creditors of companies involved in CVAs, to add some depth to its findings.

What are the main reasons for early termination or failure of CVAs ?

As I said in my earlier blog a CVA will only work if the CVA proposals and any agreed modifications are realistic, achievable and sustainable. Essentially my argument was that most CVAs need fundamental change based on a reorganising the business and often the business model.
The R3 research tends to support my view; its findings are summarised as:
The viability of the terms of the CVA agreed at its outset (or subsequently varied) was often questionable.
Often directors did not implement necessary changes or failed to identify and tackle fully the problems identified in the CVA.
Companies failed to make regular contributions and those contributions that were made simply covered the costs of the CVA process.
Some CVAs returned very little to creditors over their lifetime; either because contribution payments were repeatedly missed or because contributions were only sufficient to cover the costs of the process.
HMRC was seen as the most engaged creditor and the one most likely to vote against a CVA whether for policy or commercial reasons.
Creditors also questioned the length of some CVAs, suggesting that five years was too long, and the competence and objectivity of the nominee(s) – usually an Insolvency Practitioner – overseeing the process.
In 2016 the Government launched a consultation on proposed changes to the insolvency regime, which included a mandatory pre-insolvency moratorium to give time for the details of a CVA to be defined and mandatory protection for suppliers.
Given R3’s research findings and the policy intention of a greater focus on helping businesses to restructure and survive I would argue that it is now time for action to improve and refine the insolvency regime.

The missing research into CVAs

My own assumption about CVA failures focuses on a lack of realism when considering the operational reorganisation necessary to achieve a viable business and then the lack of experience with implementation. The issue therefore is who is best placed to help the directors given that CVA proposals are the directors’ proposals.
I have for some time advocated a distinction between those who prepare and implement CVA proposals and those who act as Nominees and Supervisors of the CVA. All too often CVA proposals are prepared by the Nominee albeit in consultation with the directors. Setting aside the conflict of interests of an insolvency practitioner developing a plan that they will then police, the issue is one of who is best placed to plan and implement change to achieve a viable business. The skills and experience needed for this are more to do with start-ups and investment which are rare among insolvency practitioners.
Replacing directors might seem an obvious answer and in larger companies this may be the right one but I would advocate that CVAs for owner-managed SMEs need independent turnaround specialists.
For those interested in learning more about how to achieve a successful CVA, you might like a copy of my free guide, please follow the link: Guide to Company Voluntary Arrangements.
 

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Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Retail CVAs – are they a triumph of hope over reality?

failed CVA? boarded up shopsMothercare has reported today that it is “in a perilous financial position”.
It seems that rarely a week goes by on the High Street when yet another retailer or restaurant chain announces that it is seeking to restructure its business by entering into a CVA (Company Voluntary Agreement) with creditors.
With footfall on the High Street plummeting, by 6% in March and 3.3% in April, while rents have continued to rise, trading conditions are continuing to be challenging, to put it mildly.
The inexorable shift to online shopping can account for some of this, but there are still retailers that have weathered the storm by developing more agile business models, often by combining online and in-store shopping, by making it easy to “click and collect” or by providing a great in-store experience.
Among the retailers that have announced that they will use a CVA as part of a restructure alongside divesting themselves of under-performing stores and food chains have been BHS, Toys R Us, Byrons, New Look, Prezzo, Select, Carpetright, House of Frazer and now Mothercare.

What are the attractions of a CVA?

Although the CVA is an insolvency process, unlike all the others it can be used to save companies. The others involve the eventual closure of the company.
A CVA requires the support of a majority of creditors who are offered better prospects for being paid than the alternative of closing down the company.
This is likely to be welcomed by a business’ employees who keep their jobs and those landlords and suppliers who keep a customer.
Restructuring provides the chance for a business to raise further capital and also the opportunity to renegotiate onerous contracts, such as leases to agree rent reductions.  From the landlords’ point of view a CVA means they can continue to receive some rent instead of being left with empty buildings for which they will need to find new tenants in a declining market.
From the viewpoint of the struggling business, it offers scope for reorganising the business to address the underlying issues that caused the problems and put it on a more sustainable footing, although they may need the help of a restructuring and turnaround adviser.
Despite the attractions and approval of a CVA, many businesses subsequently fail due to a lack of fundamental change to the organisation and business model as all too often the CVA is simply used for financial restructuring to write down debts and get rid of onerous obligations. It is rarely used as an opportunity to turn around the business.

Key to a successful CVA is the underlying business model

Toys R Us and BHS are perhaps the most high-profile examples of CVAs that failed. Both initially entered into CVAs but shortly after had to admit defeat with Administrators closing down each business.
Clearly, the terms of the CVA are crucial to a successful restructuring effort. It is a binding agreement between a company and those to whom it owes money.
This means that the directors must be honest with themselves about the problems and must take advice from experienced advisers, who will have carried out an in-depth and detailed look at every aspect of the business to identify what can be saved and what cannot.
Crucially for CVAs to succeed, they need to be realistic in terms of retaining debt that can be serviced, including any CVA contributions, but the underlying business needs to be viable with sufficient profits and cash flow to justify survival. If these cannot be achieved they will fail.

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Banks, Lenders & Investors Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Early exit from CVAs can work for the business and its creditors

business recovery signpostA Company Voluntary Arrangement (CVA) is a mechanism for an insolvent business to continue trading by paying off its debts out of future profits over a period of time providing it has the consent of 75% of creditors.
Many CVAs are structured to run for a five-year period with monthly payments throughout that time.
Generally, they cannot be varied during the first 12 months, mainly due to a standard modification that is a condition for approval by HMRC’s Voluntary Arrangement Service (VAS).
However, there is scope for varying the original terms of a CVA by making a subsequent proposal to creditors for early termination after the initial 12 months. Like the original CVA this requires 75% approval of creditors but it can involve offering revised terms, such as less money now rather than that offered over 5 years.
If such a variation is likely to be approved by creditors the business and its shareholders will need to be in a position to raise a lump sum either by borrowing or by attracting further investors.

The benefits of an early exit from a CVA to the company 

The business will benefit from paying less money as a proportion of its debt with more being written off. The effect of this will have the additional benefit of a stronger balance sheet post CVA.
Early termination will also free the company from its monthly obligation and as a result improve its cash flow.
Once clear of the CVA it will be in a better position to pursue more aggressive fund-raising and growth strategies and will be able to resume paying dividends to shareholders.
The benefits of an early exit from a CVA to creditors are mainly that they will receive cash sooner, rather than waiting for a longer period and receiving their money in small increments. They also avoid the risk that the CVA might fail.
The question is why more businesses do not take advantage of the option for an early CVA exit. One possible explanation is that the Insolvency Practitioner (IP), who may have been an adviser prior to the CVA, becomes a supervisor representing creditors and therefore is no longer an adviser. Another may be that early termination stops the supervisor earning their fees.
We believe that IPs who take formal appointments such as acting as nominee and supervisor of a CVA should be independent throughout and therefore should not act as advisers to the company since they are required to represent the creditors. Furthermore, they should insist companies have independent advisers who are best placed to assist on matters such as considering options for the early termination of CVAs. In this way IPs can avoid a conflict of interest.

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Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

Why isn’t more effort made to rescue failing businesses?

It is almost 30 years since legislation in the Insolvency Act 1986 introduced Administrations and Company Voluntary Arrangements (CVAs) as mechanisms intended to help with turning around failing businesses.
This legislation followed the 1982 Cork Report, which recommended procedures for trading out of insolvency.
Despite this and further legislation, however, there has not been any noticeable increase in rescue attempts where Insolvency Practitioners have been brought into companies in distress.
We explore why this should be and whether anything can be done to encourage more banks and IPs to embrace the rescue culture so that more businesses can be saved.
To see the full article please visit: Insolvency Today at http://bit.ly/17TpoJj or join the lively Insolvency Today LinkedIn discussion here http://linkd.in/1cBA6vD

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Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Insolvency does not have to be the end of your business

When an SME encounters cash flow difficulties and cannot pay its bills many owners assume that their business is bust and should close.
It does not have to be the case. If the core of the business of a company is offering a genuinely useful and saleable product or service, it can normally be saved.
A detailed look at cash flow and accounts is the first step in the process of turning around a struggling business although this needs the help of a business doctor plus commitment, realism and honesty on the part of its owners.
The business doctor will help to identify the profitable activities that should be saved and also has a number of techniques in the toolbox to help deal with the pressing debts that impact on cash flow.
An increasingly useful tool provides a way of dealing with debt by reaching agreement with creditors to repay all or part of the debt in an affordable way that allows the business to focus on building its strengths for the future.
This is a Company Voluntary Arrangement also referred to as a CVA.  The CVA is a binding, formal agreement that is agreed with creditors but needs the help of a business doctor or turnaround adviser. To find out more, K2 Business Rescue has published a useful guide to the steps that need to be taken: K2 CVA Guide 2013. A copy along with other useful guides is available as a free download via the Resources section on the K2 website.

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Banks, Lenders & Investors Business Development & Marketing Debt Collection & Credit Management General Insolvency Personal Guarantees Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Latest insolvency stats suggest Zombie companies are still hanging on

The latest Insolvency stats suggest that Zombie Businesses are holding back the UK Economy.
A summary of the Q2 2011 UK insolvency statistics shows: Compulsory Liquidations up; Voluntary Liquidations down; Administrations down and CVAs static.
Against a background of slowing growth over the last three quarters of the UK economy, perhaps the picture of what has been going on is becoming clearer.
Unlike most insolvency and turnaround practitioners, I do not believe that we will soon be busy restructuring the large number of over-leveraged businesses.
I believe businesses are putting off restructuring and will do so for as long as possible, at least while the economy is uncertain. Historically insolvencies have increased during the upturn after the bottom of a recession, when business prospects can be predicted. Right now it is not clear if we have reached the bottom and if there will be any growth, let alone how much, or if the market will flatline for some time.
One set of figures, the increase in compulsory liquidations, does indicate a level of frustration over companies not taking action to deal with their debts. Creditors are becoming impatient with directors who are putting off restructuring and starting to force their hand by issuing a winding up petition. But even these figures are very low.
The tragedy is that without restructuring, a great many so called ‘Zombie businesses’, lack optimism to plan for the future. They have run down their stock levels, cut staff to the bone, do limited marketing, are not investing nor looking for growth opportunities let alone looking abroad and are not laying foundations for their future.
The lack of optimism is resulting in quality and service levels being in decline and as a result they are holding back economic recovery because they are not investing in it.

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General HM Revenue & Customs, VAT & PAYE Personal Guarantees Voluntary Arrangements - CVAs

How to protect Personal Guarantees when a company is insolvent

Many insolvent companies are being run to avoid the triggering of personal guarantees given by directors and owners.
Most personal guarantees are provided to secured creditors such as a bank to cover loans or overdrafts that are already protected by a debenture which provides for a fixed and floating charge over the company’s assets. In such cases the personal guarantee is often only triggered by liquidation when the bank is left with a shortfall.
In view of the above I am astonished how many directors plough on, stretching payments to HMRC and extending unsecured creditor liabilities without fundamentally improving their company’s financial situation via a company voluntary arrangement (CVA).
Secured creditors stand outside a CVA and therefore they have no need to call upon a personal guarantee.
I would urge all professional advisers, including accountants, lawyers and consultants to learn about CVAs since they are such a powerful tool for saving companies and in so doing avoiding personal guarantees being triggered.

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Banks, Lenders & Investors Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Interim Management & Executive Support Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Many companies for sale turn out to be insolvent

Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.
However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it. 
This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.
Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.
In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.
One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.
As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.

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Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Voluntary Arrangements - CVAs Winding Up Petitions

HMRC Insolvency and Enforcement workload

The HM Revenue and Customs insolvency and enforcement department in Worthing appears to have an increasing workload.
I believe there are several likely reasons for this. Businesses are continuing to withhold payment of PAYE and VAT liabilities, using any cash available to prop up their businesses. Fewer Time to Pay arrangements are being approved by HMRC and a lot of TTP arrangements are failing. The Revenue have also have resumed using seizure and distraint as a method for collecting overdue tax.
HMRC in Worthing are picking up the pieces, which probably explains the large number of Winding Up Petitions that dominate the Companies Winding Up Courts.
The only options for saving a company with a WUP are either paying the undisputed amount due or a Company Voluntary Arrangement and the Courts are generally happy to adjourn the Petition at the first hearing to allow time to either pay the bill or propose a CVA.
There is considerable evidence that HMRC are supporting the rescue of companies via CVAs although their focus is on proposals being realistic and incorporating fundamental change to ensure survival rather than continuing the old business model.
I am not yet clear whether the upsurge in HMRC Worthing’s activity relates to the traditional post recession increases in company failures when the market begins to grow, or whether the downturn is continuing and companies are just not able to hang on any longer.
However all of us in the restructuring profession must urge the directors of companies in difficulties to act urgently if they are to save their company, and that they or we as advisers keep HMRC fully informed of progress during the development of rescue plans.