Insolvency need not bring down the curtain for arts organisations, says Ian Walker, who is working with the Exeter Northcott theatre.
No one would dispute the need for an arts organisation to be run like a business; it will not survive meaningfully in any other way. Theatres and arts centres get into the same financial difficulties as ordinary businesses: cashflow problems and, sometimes, poor leadership. Often, this will be combined with internal management conflict or systems which counteract timely and decisive remedial decision-making.
BUSINESS BANKRUPTCY
A business will become insolvent when it is either unable to pay its debts as they fall due or when its assets are worth less than its liabilities. In other words, when what it owns has less value than what it owes to other people. However, neither of these scenarios means that formal insolvency is a foregone conclusion. Many of us have short-term cashflow problems without going bust – we may wait for payday before we pay our bills. If the scale of the cashflow problem is too great to keep trading, then it is the duty of the directors (trustees) to get professional help.
Once insolvency practitioners have been called in, it is their job is to identify the extent of the problem and decide what the best solution is likely to be. The first thing to establish is whether the cashflow problem is symptomatic of a wider, more fundamental structural problem. In the light of those findings, it’s then quickly decided which route to go down – liquidation or administration.
Liquidation is the worst case scenario, when the situation is basically beyond repair. The business is wound up and all assets are sold, in order to repay as many creditors as much money as possible. There is no way back, and the organisation ceases to exist. Administration, however, is the solution of choice. It can offer real hope for the future, since it makes the rescue of a company/arts organisation the priority. On the whole, the administrator – who is appointed by the directors/trustees and must be a licensed insolvency practitioner – acts in the interests of creditors. He or she takes control of the organisation and has eight weeks, from the date of appointment, to come up with an agreeable rescue plan.
RESCUE REMEDY
During that eight-week period every facet of business activity is examined. The performance, quality and number of staff and their responsibilities, training and remuneration, and how well they work together; financial information from sales and purchase ledgers; box office trends; quality and effectiveness of marketing; programming past, present and future; assets, from costumes to buildings; decisions taken at board and management level; relationships with funders, from Arts Council England to the bank, and with its audiences. The investigation will identify what caused the insolvency and enable the administrator to draw up proposals for its survival. Inevitably, some of the actions taken just to cope with the immediate future will be difficult. Redundancies may have to be made, and productions cancelled if their projected loss is too high. There can be no gain without pain – long-term survival is the prize.
The aim is to put in place effective solutions. Management structures may change, stakeholder relationships may be renegotiated, targets may alter, and public sector funding may be secured, at least for the short to mid-term, to enable other aspects of the business to be improved. New investors may inject fresh capital, not just to fill the ‘black hole’ but to enable investment into areas that are lacking. The thrust and balance of programming may change. The make-up of the board may be altered to deliver better leadership and communication. Responsibilities may be reallocated, and liabilities such as leases or rents may be removed from the picture by looking at the organisation’s needs differently. At the end of the administration process, if the ‘old’ company cannot survive, it is usually liquidated and a new company is created. The organisation that emerges out of administration will not be the same one that went in, but its value and role in the community will have been confirmed, and a sustainable future will be achievable.
Key Terminology: a brief summary of the types of insolvency which apply to companies
Liquidation: where assets are sold and the proceeds distributed to creditors and the company ceases to exist. There are two types: Compulsory Liquidation (by the Court) and Creditors’ Voluntary Liquidation.
Administration: an appointment is made and the administrator, who must be a Licensed Insolvency Practitioner, acts as detailed in the article above.
Administrative Receivership: a process where businesses and their underlying assets can be sold, primarily with a view to repaying secured creditors. The company often continues to trade under the control of the administrative receiver while attempts are made to find a buyer.
Company Voluntary Arrangement: an arrangement of contract between a company and its creditors which gives protection to creditors while proposals are formulated and approval sought.
IAN WALKER is Insolvency Practitioner and Partner at national business rescue and restructuring firm Begbies Traynor in Exeter.
w http://www.begbies-traynorgroup.com