The administration of the Four Seasons care home group is the latest in a line of high profile insolvency processes of companies providing services to the public sector, coming hot on the heels of the Interserve administration and following the liquidation of Carillion last year. But, how should you react to the latest failure in the care home sector?
In the case of Four Seasons and Interserve, the message has been “business as usual” with the parent company going into administration, but the subsidiaries operating as normal. However, whilst the business and assets of Interserve’s top company were bought by an entity set up by its banks with an assignment of debt and security, the search for a purchaser of Four Seasons continues.
“Business as usual” may not therefore continue forever in respect of Four Seasons if a purchaser cannot be found for the care home provider. Alternatively, the group may be split up. What is clear, however, is that it remains a worrying and uncertain time for those contracting with entities in the healthcare sector and revives memories of the Southern Cross collapse.
The average return from an administration is one pence to three pence in every pound owed. The return on liquidation is usually lower and often unsecured creditors recover nothing in either process.
Where will you be left if one of your counterparties, key or otherwise, goes into an insolvency process? If that happens, can you do anything about it?
There are various ways to increase your recovery prospects on an insolvency process, including obtaining security or guarantees, retaining cash and/or reducing payment terms, retaining title over goods supplied until they are paid for or creating a lien, depending where goods are held post-delivery.
You also need to carefully consider your standard terms and conditions and what they say about the insolvency of a counterparty. Can you terminate contracts if a counterparty or a group company is insolvent as well as being in an insolvency process? There is a difference. Can a counterparty terminate on its own insolvency? These clauses are not just boilerplate, they could be crucial.
A reactive approach to the insolvency of a counterparty can result in a significant loss. A proactive approach can have financial, as well as reputational benefits. Planning for the failure of your counterparties will give you a better chance of recovery and mitigating the effect on your own business.
As well as representing a risk for contracting parties, subject to the deployment of the protection mechanisms mentioned above, the insolvency processes of entities in the healthcare sector may also be an opportunity.
It is usual for a purchaser to buy the business and assets out of a company in administration, leaving liabilities and other issues behind. As a purchaser has limited time and opportunity for due diligence, inevitably that reduces the price of assets being sold.
If you have the money and can demonstrate funding for payment in full on completion, then you will be well placed to make the most of opportunities to expand your business through purchasing out of an insolvency process.