Iain Young and Alan Meek: Few businesses are '˜too big to fail' nowadays

There is little doubt that some of the biggest business news stories in recent weeks have been the collapse of construction and support services company Carillion into liquidation and the insolvencies of high-street name retailers Toys R Us, Maplins and New Look. In addition there have been significant restructurings at leading restaurant chains, such as Jamie's Italian, Carluccio, Byron Burgers and Prezzo.

The collapse of Carillion has had knock-on effects for staff, contractors and sub-contractors

Aside from the banks who were bailed out by the government after the collapse of the global economy in 2007, there are few businesses which are deemed to be “too big to fail”. Yet Carillion has come close to earning that title. The clearing banks set up a fund to provide money to support small business customers who were part of the Carillion supply chain and who were struggling after its failure. The banks pledged £225 million in support, a mere drop in the ocean compared to the sum of around £1.5 billion owed at the time of its liquidation. In addition the government formed a task force and plans were put in place to deal with the vast number of public sector contracts for which Carillion was the main provider.

Yes, there will be pain for the employees of Carillion who have lost their jobs, but there could be greater repercussions for businesses who are sub-contractors to Carillion, who may find that they have lost their largest customer and are therefore in dire circumstances.

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Termination of a sub-contract as a result of the liquidation or administration of the principal contractor can have ripple effects and sub-contractors experiencing those effects should take advice from someone who is qualified in insolvency. You will need to check your cash flow forecasts to ensure that you can meet your debts as they fall due in the event that expected contractual payments will no longer be made. If you cannot then you will be technically insolvent and in order to avoid potential personal liability for wrongful trading the directors of an insolvent company need to follow a checklist of steps, designed to ensure that losses to creditors are minimised.

And arguably, it is that ripple effect from a large employer such as Carillion, which finally tips the retail and restaurant businesses over the edge. When consumer confidence is already fragile, pay rises (to the extent there have been any) have lagged behind inflation and interest rates seem to be heading in only one direction, it does not take much additional strain on a household to decide to reduce their discretionary spending on items such as eating out and shopping.

At Morton Fraser we have been heavily involved in advising a number of businesses which have suffered from this ripple effect. If potential problems are identified early enough in the cycle then it is possible to take steps to address them, through constructive discussions with lenders or providers of alternative funding (whether equity or debt). The opportunity also arises to shut down or sell off loss-making or less profitable parts of businesses, allowing management to focus on ensuring the core business remains strong and is not distracted (and ultimately dragged down) by non-core problem businesses.

It may be necessary to address employment issues: are there too many people fulfilling managerial functions which could be carried out more economically by a lesser -paid employee taking a step up the corporate ladder ?

Choosing to do nothing and awaiting the inevitable is rarely an option which produces a satisfying outcome.

So if you find yourself drowning and not knowing where to turn in the event of difficult trading conditions then turn to us and we will try and guide you to safer shores.

Iain Young and Alan Meek are partners at Morton Fraser