The independent veterinary sector is facing threats to its survival. Firstly, there’s the recruitment crisis that’s forcing some practices to close. In June 2021, VetHelpDirect wrote, “The veterinary profession in the UK is in crisis. There are too many practices who aren’t able to recruit enough vets to fill their rotas. And out-of-hours care is similarly in trouble.”
By way of example, back in October 2022 an Isle of Wight veterinary practice closed suddenly and “temporarily” because of the loss of out-of-hours care provision. IVC Evidensia, owner of The Mobile Vet, said, “The decision was made due to the withdrawal of out-of-hours services by a third party.” The closure was formally made permanent in June 2024.
Then there’s the acquisition spree that the corporates have been on over the last 10 years or so. As The Guardian reported in March 2024, “large chains could be squeezing out independent practices… Since 2013, about 1,500 of the 5,000 vet practices in the UK have been acquired by six of the largest corporate groups: CVS, IVC, Linnaeus, Medivet, Pets at Home and VetPartners.”
The Guardian noted that as a result, the Competition and Markets Authority (CMA) is launching a formal investigation into the veterinary market after identifying “multiple concerns” in an initial review, including that pet owners may be overpaying for treatments and medicines. What the outcome could mean for practice revenues is yet to be determined, but it’s not going to be helpful.
Businesses fail for one reason or another. Sometimes they fail and cannot be resurrected, with their assets sold off to repay creditors. Others fail but re-emerge, almost immediately, in another guise, preserving the jobs of employees.
The profession has not been exempted from seeing distressed businesses. Veterinary Practice Initiatives Limited went into administration in 2006 and a creditors voluntary liquidation in 2010 following a deficiency of £8.1 million in funds. And Meadows Farm Vets Limited was almost put into compulsory liquidation in 2016 upon the petition of HMRC as a creditor; the matter appears to have been dealt with as the practice is still trading.
In such sad situations there are always losers, and a bitter taste left in the mouth. For directors, such situations mean particularly choppy waters to navigate.
What is insolvency?
A company which has a balance sheet surplus may nonetheless be cashflow insolvent if its assets are illiquid, and a company that currently has sufficient cash to pay its debts when due may be balance sheet insolvent on a longer-term view
Jamie Leader, a partner and head of insolvency and restructuring disputes at Enyo Law LLP, thinks it important to understand what insolvency really means.
He explains that there are two forms of insolvency recognised by English law: an inability to pay debts when they fall due, often referred to as cashflow insolvency; and an excess of total liabilities over total assets, referred to as balance sheet insolvency.
As he points out, “a company is technically insolvent if it meets either test. So, a company which has a balance sheet surplus may nonetheless be cashflow insolvent if its assets are illiquid, and a company that currently has sufficient cash to pay its debts when due may be balance sheet insolvent on a longer-term view.”
Paul Taylor, a partner in the corporate department of Fox Williams, adds more flesh to the bone. He explains that while the technical wording of insolvency is set out in the Insolvency Act 1985, a company will also “be deemed to be unable to pay its debts by a court if it fails to comply with a statutory demand or satisfy enforcement of a court judgement debt awarded against it”.
Time to pay arrangements
Occasionally firms seek to enter a time to pay (TTP) arrangement, suggesting that the debtor is cashflow insolvent. However, Jamie sees TTP as “a crucial tool in overcoming short-term cashflow difficulties without the need for formal insolvency proceedings”.
Paul is of the same opinion. He holds TTP out as a simple reconfiguring of payment deadlines, “meaning that the company will have more time to repay the debt, allowing it an opportunity to ensure it has sufficient assets to repay the debt when it eventually becomes due”. His point is that TTP is not necessarily a bad thing.
Regardless, though, he notes that “there is no inflexible rule that a company should go into liquidation immediately upon the directors deciding that it is insolvent”. Rather, he says that “it is up to the directors to consider all the available options and to decide which will best protect the interests of creditors”.
Directors’ duties when a firm heads for the buffers
If directors ‘don’t take proper account of the interests of creditors, they will be at risk of personal liability if the company does fail’
When business is upbeat, the primary duty of directors according to Paul is to “promote the success of the company for the benefit of the shareholders and other stakeholders”. However, when storm clouds appear, with the potential for insolvency, he warns that “the primary duty of the directors is to minimise the losses of the company’s creditors”. As a result, directors should “not do anything in the course of trading that would be deemed disadvantageous to creditors”.
In this situation, Paul’s advice is clear – directors need to consider their actions very carefully, particularly in regard to the effect of their decisions on creditors. He says this because if directors “don’t take proper account of the interests of creditors, they will be at risk of personal liability if the company does fail”.
Good corporate governance is critical. However informal management may have been in the past, once a company encounters financial distress it should hold regular board meetings and prepare detailed minutes to record the reasons for the directors’ decisions. Such evidence, in Paul’s view, will be invaluable in defending against any future allegations of breach of duty.
It goes without saying that if directors are in any doubt about what to do, they should seek (independent) professional advice – quickly.
Continuance of business
Directors recognise that the actions they take while the company is insolvent will be fully scrutinised by a liquidator or administrator
But can an insolvent company continue to trade? Here, Paul says that they can – “in appropriate circumstances, but it is risky”.
Jamie agrees, stating that “the risks of continuing to trade include wrongful or fraudulent trading, and/or misfeasance, which is where a director is found guilty of breaching their fiduciary duties”.
He thinks it critical that directors recognise that the actions they take while the company is insolvent will be fully scrutinised by a liquidator or administrator.
He cites section 214 of the Insolvency Act 1986 and says that “a director can be personally liable to pay towards the assets of a company if the director allows the company to continue trading at a time, when the director knew (or ought to have known) that there was no reasonable prospect of the company avoiding insolvent liquidation – this is known as ‘wrongful trading’”. He adds that if this is proven, directors can be held liable to “pay compensation equivalent to the estimated loss incurred by the company, calculated from the point that the directors knew, or ought to have concluded, the insolvency of the company to the point of formal insolvency”.
However, Paul reckons that where directors have good reason to believe that a period of cashflow insolvency is only temporary, it may be in everyone’s interests that the company trades on to restore itself to solvency. In fact, he reckons that “to liquidate the company in those circumstances might be highly value-destructive for all stakeholders. However, directors should ensure that their projections are realistic and, if they are not sure or if the problems are not merely temporary, they speak to an insolvency practitioner so as to decide how to proceed.”
On a tangent, he cautions firms looking to raise funds that asset sales are a particular area of risk. This is because, as he details, “in the event of an insolvency, any sales of substantial assets that took place in the period before the company collapsed will inevitably be closely scrutinised and may be challenged”.
Company voluntary agreements as an option
A company voluntary agreement allows a struggling company to make a proposal to its creditors to restructure its liabilities that includes delaying payments and/or reducing the amounts due
Paul says that directors can put the company into administration or liquidate it which entails “winding-up” – this results in the company being closed down and its assets sold/distributed to creditors.
They can also contact the company’s creditors to see if they can enter the company into a company voluntary agreement (CVA).
And this isn’t such a bad move per se, says Paul, as “it can be a useful tool for managing financial distress and achieving a better outcome for all stakeholders”.
He explains that a CVA allows a struggling company to make a proposal to its creditors to restructure its liabilities that includes delaying payments and/or reducing the amounts due. If a majority of the creditors accept the proposal, it becomes binding on all.
The key, however, to a successful CVA is whether the underlying business is viable. If it isn’t, a CVA will fail. But to get a CVA off the ground, 50 percent or more shareholders and 75 percent or more creditors must agree to the terms, and secured creditors will not be bound by the terms of the CVA.
Even so, Paul says that CVAs aren’t perfect and don’t always succeed. This is because when preparing a proposal, it can be hard to strike the right balance between cutting hard enough to address the company’s financial difficulties and proposing terms that most creditors will support. As a result, he says that approved proposals still see some companies fail later on. Nonetheless, he reckons that “CVAs are an invaluable part of the insolvency practitioner’s toolkit and, when used well, can deliver excellent results”.
Removing an insolvent company from Companies House
Some directors think that removing – striking off – their company from the Companies House register will remove their personal risk. However, Paul thinks that “the better approach in most cases will be to use a formal insolvency process to ensure that the company’s affairs are properly dealt with”.
In fact, he’s of the view that “directors who use dissolution to seek to avoid engaging with the creditors are likely to increase their risks of personal liability or disqualification”. Worse, if they intentionally avoid notifying creditors of the dissolution process, they could even commit a criminal offence.
Indeed, Jamie points out an essential requirement of voluntary strike-off – that the company must be under no threat of liquidation; anything otherwise “could result in the director being found guilty of misconduct and could result in them being held personally liable for the debts of the company”.
Final thoughts
Business failures happen. That’s life. However, directors of afflicted firms must not ignore the law and act incorrectly. If they do, they risk personal liability and possible disqualification from being involved in the management of a company for quite some time.
Taking and acting on good advice, and following good corporate governance procedures, will clearly reduce the risks.
