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Avoid the car crash

Updated: Nov 30, 2022

Our articles have consistently highlighted that waiting for the regulatory hammer to fall is never the best approach for your business, your clients or the regulator: early pragmatic action is always more effective, by some margin. That’s also true for capital restructuring.

The capital base of the SIPP industry is under severe pressure: it is having to come to terms with the cost of regulatory obligations that didn't exist previously, and higher capital and liquidity requirements. Although we tend to think of a capital crisis as a single event akin to a car crash, restructuring - if done early enough - can avoid its worst effects. New and useful restructuring tools have been developed over the last twenty years.

Early restructuring

A company rescue expert we work with told us that most of his clients wished they had made contact 6 or more months previously. That’s because the longer you wait to restructure a business the fewer choices you have - and the ones that remain are distinctively unattractive. The worst is insolvency triggered by a creditor. The liquidator is tasked with closing the business down and maximising returns to creditors - and has the power to incur large costs, leaving very little (if anything) for shareholders.

Going into administration (see Liberty SIPP) is only slightly better. An administrator is appointed by the Court and is legally obliged to get a better result than straight insolvency, ideally selling it to new owners. But an administrator is personally saddled with all the company's liabilities (including the taxman and employment contracts) so has little incentive - or remaining cash - to maximise the return to shareholders. If a sale is not achieved, the company then moves into insolvency.

Other options

At the other end of the spectrum there are a number of more attractive options depending on the amount of time available, and the specifics of the situation.

"Pre-packs" have made regular appearances in the business pages of late. A pre-pack is about packaging and pre-arranging the sale of the viable parts of a business to another entity (possibly even owned by existing shareholders), leaving the remaining liabilities in the existing company - which then goes into administration. The core principle is that a sale agreed before full administration will normally achieve a better price than one arranged afterwards.

A Company Voluntary Arrangement (CVA) is probably the best option for both shareholders and creditors in dealing with large historic debt. It provides valuable breathing space by negotiating a legally binding repayment package that gives the firm time to trade out of its problems. Creditors may end up with only 50p or 75p in the £1, but that's usually better than waiting for 10p in the £1 on insolvency or administration. The firm itself stays as it was.

If there is concern that trading prospects might be damaged by the existence of a CVA, the trading assets of a firm could be ‘hived’ to either another new group company, leaving the donor company to enter into a CVA with the hived company as security.


Whatever approach is taken, candid early disclosure about the circumstances and potential remedies to the regulators is essential – and not just to comply with Principle 11 (open communications). Early buy-in from the regulator is an important enabler for the inevitable approval that will be required later.

And, of course, the regulator needs to be content that the interests of customers are being looked after. Attempting to ‘phoenix’ via a pre-pack is unlikely to be successful: regulators will want to ensure that all regulatory liabilities will be met. Our expert friends agree that a common sense approach backed up by clear competence counts for a lot in gaining regulatory acceptance.

Business model

Bear in mind that capital restructuring can’t fix a broken business model – that’s something that needs to be done beforehand. For SIPP firms, as a first step that means setting fees at a level that covers the higher operating cost of today’s regulatory environment. But that is the absolute minimum. Once a potential car crash has been avoided, the time bought by restructuring shouldn’t be frittered away: this is an opportunity to optimise the business and put it on a solid footing for the long term.

We have deep expertise in the SIPP business and can assist (at SIPP-friendly cost) at all stages of getting through this – whether it is buttoning compliance down, improving operational efficiency, new technologies and products, or due diligence on acquisitions.

Coming back to our theme, there are more options available than you probably thought for restructuring a business in these difficult times. But they require the consent of regulators, they require a profitable business model, and even then are only available to those who act early enough!


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