Is insolvency the only option after COVID-19?
Helen Wong and Pei Li Kew examine the legal framework in place for practices struggling to remain open.
Businesses going into administration or liquidation is, sadly, no longer front-page news. Carluccio’s, Debenhams, Carillion – just to name a few from various sectors. Times are hard, creditors unforgiving, and supporters few and far between.
It is, however, extremely rare to hear of dental practices going bust. The dental sector is generally resilient. An NHS contract guarantees a stream of income. While demand for cosmetic dentistry has helped private or mixed practices thrive. And no matter the financial condition of the state, people’s teeth will continue to need fixing.
Dental practices are now slowly reopening throughout the country. However, many still face desperate cash flow and viability issues arising from the coronavirus shutdown. We look below at what the next steps might be for dentists struggling to stay afloat.
What happens when a dental practice is unable to meet its debts as they fall due?
Measures under NHS contract
For NHS practices, there are contractual obligations to notify the NHS if the practice cannot pay its debts or is facing bankruptcy, liquidation, or administration. Legally, the NHS then has the right to terminate the contract. Or else to impose certain sanctions on the practice (including suspending the contract and withholding contract payments).
However, given the current situation, it is unlikely that the NHS will consider carrying out any of these until the dust has settled from the pandemic.
Usual clawback measures will continue to apply where practices don’t meet targets set in NHS contracts.
Administration (for corporate practices)
A lack of action by the NHS, however, will not prevent the usual statutory insolvency procedures from operating. Current conditions may force corporate dental practices (whether NHS, mixed, or private) to enter administration. Under which the company reorganises or sells its assets to rescue itself if possible.
In the case of an NHS practice, as NHS contracts cannot be bought or sold, a possible outcome is that the company itself is sold for very little cash but in exchange for the buyer settling the company’s debts.
Private practices may also sell in the same manner. Or, where buyers are unwilling to take on the practice’s debts, the practice may only sell the goodwill and business operating out of the company. With the proceeds of that sale discharging the practice’s debts.
Where it isn’t possible to rescue the company, the administrator will aim to sell the company’s assets to repay its creditors as much as possible. This results in the winding up of the corporate practice at the end of the process.
Liquidation or bankruptcy
Administration is an expensive process with no guarantee of saving the company. If administration is not viable, corporate dental practices face the threat of compulsory liquidation if any of its creditors present a winding-up petition at court against the practice. Individuals who run a practice (alone or in partnerships) could similarly face bankruptcy petitions.
Depending on whether the practice is a corporate practice or run by individuals, the court may issue a winding-up or bankruptcy order. And the practice and its assets will come under the control of a liquidator or a trustee-in-bankruptcy. They will then have the task of collecting and realising the practice’s assets to discharge its debts as far as possible.
Dentists should rest assured that liquidation or bankruptcy alone is unlikely to affect their fitness to practice. Or their registration with the General Dental Council.
For corporate practices, its members rank bottom in the order of distribution of assets. If the practice is insolvent, it is unlikely that the members will receive any proceeds at all. Once the proceeds have been distributed, the company is then dissolved and will no longer exist.
Are there any government concessions for companies facing liquidation, or individuals facing bankruptcy?
Not with regard to individuals facing bankruptcy.
For companies facing liquidation, a bill is passing through Parliament to help them continue trading by introducing measures such as preventing creditors from presenting a petition to wind up companies that are struggling due to COVID-19, and temporarily suspending the law prohibiting wrongful trading of companies. This latter measure will allow directors of the corporate practice to continue to ‘trade’; ie to pay the practice’s staff and suppliers, without wrongfully trading in the event that the practice becomes insolvent.
Nevertheless, these measures are only temporary. Practices may find the negative effects of COVID-19 remain once the government withdraws measures. Directors of corporate practices should also not let their guard down once they sense the practice is heading towards insolvency. They remain bound by various other statutory, common law, and equitable duties to have special regard to the interests of creditors.
What are the alternatives to administration/liquidation?
Given all of the above, it is highly unlikely for practice owners to realise any value personally once their practice becomes insolvent.
Rather than sitting down and accepting that the practice may have to face insolvency, there are a number of measures which are available to the dental sector. See ‘More help needed for dentists as 20% estimate they can only survive for one more month’, for example.
But if a long, hard look at the numbers still reveals that insolvency could be the only option available in a few months’ time (especially if the business lockdown continues), practice owners should consider whether a sale of the business may be a better alternative to insolvency.
They must do this before the practice reaches the ‘zone of insolvency’; ie where there is no reasonable prospect of the company avoiding insolvency. If the practice enters the zone of insolvency, any subsequent transactions may be overturned. If a corporate practice is involved, directors may be personally liable for payments made by the company. In the same way, there are circumstances where the sale of a practice by its individual owners may also be overturned. Practice owners should seek expert advice at the earliest possible opportunity if they do consider a sale of their practice in these times.
Dental practice values
A major benefit to a sale is that it grants practice owners the chance of realising a return on at least some of the investment into the practice over the years. There is value in a dental practice. Whether by reason of the NHS contract it holds, or due to the burgeoning demand for cosmetic dentistry. And there are still buyers on the hunt for practices, even in these times.
NHS and mixed practices are an especially attractive proposition. Before the pandemic, large corporate buyers looking to add to their portfolio of practices, and individuals looking to gain a foothold in the sector targeted both of these practices. Currently, the main buyers in the market will likely be cash-rich individuals. Many corporate buyers rely on funding from banks. And banks are unlikely to give much consideration to run-of-the-mill financing at the moment.
Purely private practices often tend to be the target of large corporates. So there may be less demand for these practices. Current conditions will not deter all corporate buyers, however. They may view that the time is ripe to identify practices cash-stripped, but viable nonetheless.
With regards to an asset sale, although strictly speaking an NHS contract cannot be transferred, the buyer may enter into a partnership with the seller who subsequently retires from the practice, leaving the buyer as the sole owner of the practice.
A sale also means practice owners can retain control of the process. This includes negotiations with the buyer and the timetable of the sale. This leads to much more flexibility for the owner, who, also knowing the ins and outs of the practice and having built relationships with suppliers, can deal with the quirks and nuances of the practice as they arise. The ability to map the steps also creates less disruption to the practice’s employees and patients.
If there are corporate practice owners who nonetheless decide that insolvency is the best option for their practice, it is important that independent professional advice is sought as soon as possible to achieve the best possible outcome for the practice. At the same time, practice owners should remain fully informed of the practice’s affairs. And that they record all material decisions about the practice.
Meanwhile, for practices that are considering selling up, owners should shore up the practice’s finances. Make the most of the government and other external schemes in place. This will help businesses through the pandemic and avoid the insolvency zone. Longer-term, they should also ‘get the house in order’ by tidying up records. Any buyer will conduct a thorough examination of the practice to ensure that they are getting their money’s worth.