Breweries — how to navigate financial difficulties

This article was originally published in the Brewer’s Journal UK Summer 2023 digital edition on 31 May 2023. Read the original version here.

The cost-of-living crisis has severely impacted retail and hospitality and there is a growing fear that 2023 could see a wave of company collapses, especially in the brewery sector.

Here, Senior Associate Daniel Finn explores the options available for breweries facing financial distress.

It is a sobering thought that nationally more than 57,000 businesses are now in significant financial distress with business owners trying their best to tackle a mixture of adversities, including legacy debts as a result of the Covid pandemic, high interest rates, spiralling energy bills and production costs.

Some of the recent casualties are the Somerset-based craft brewery company, Wild Beer Co, which entered into administration at the end of 2022, Dig Brew Co in Birmingham, Bad Seed Brewery in Malton, Totally Brewed in Nottinghamshire and Southampton’s Unity Brewing. If you are a director of a brewery which is in financial difficulty, there are a number of issues which you are likely to be considering — no doubt at the top of this list is how to keep the lights on and continue trading. However, significant care should be given to the legal implications of your decision making as soldiering on may leave more than a sour taste in your mouth.

Directors’ duties

As a director you are in charge of the management of the company’s business and responsible for ensuring that decisions are made in line with your statutory duties pursuant to the Companies Act 2006.

One of the fundamental statutory duties you owe is to promote the success of the company for the benefit of its shareholders. However, this duty shifts when a company is struggling, such that decisions may need to be made for the benefit of the company’s creditors as a whole instead.

The point at which you should have regard to creditors’ interests is:

1. when you know or ought to know that the company is insolvent or bordering on insolvency; or
2. an insolvent liquidation or administration is probable.

It is not always easy to determine when the creditors’ duty is triggered but the general rule of thumb is that the greater the financial difficulties of the company, the more weight should be given to the creditors’ interests. Therefore, it is easiest to picture this as a sliding scale whereby a solvent business should be run for the benefit of the shareholders, a company bordering insolvency (i.e. cash flow or balance sheet insolvent) should be run for the benefit of both the shareholders and the creditors, and finally, where there is no reasonable prospect of avoiding insolvent liquidation or administration, the creditors interests should be paramount.

There is no ‘one size fits all’ with this test and the particular circumstances of your business will need to be considered when determining whether the creditor duty arises and if so, when it arises.

The implications of failing to make decisions in the interests of the creditors when the duty arises should not be taken lightly, particularly if the company does eventually end up in administration or liquidation. This is because an insolvency practitioner will be appointed over the company and will investigate whether the directors are at fault for the events leading to its demise. If you were in breach of your duties as a director or continued to trade the company when you knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation or administration, then you would be exposed to potential personal liability.

It is therefore imperative that you spot the signs of financial instability as early as possible and take immediate precautionary steps to limit the potential harm to the company, its creditors, and you personally. The most important way you can limit harm is by seeking professional advice in order to consider the options available to you. The most common options are touched upon briefly below.

Turnaround

An effective turnaround strategy will eliminate the need to enter into a formal insolvency process, but it needs to be managed carefully. Professional advisors will be able to assist you with the different restructuring options available to the company including, for example, rationalisation and extra financing.

It is worth mentioning that many breweries that operate taprooms, pubs or bars will also utilise a group structure in which each ‘outlet’ is shielded within a separate company ultimately all owned by the founder(s). The benefit of this is that if one bar were to cease being profitable and closed down or in a more drastic scenario, if the brewery itself were to close, then the other bars could potentially continue to trade. A recent example of this is the closure of Totally Brewed's brewing business that planned continuation of trading with their successful Beeston bar. Therefore, setting up your brewery and bars with the right corporate structure is crucial.

Administration or liquidation

If a solvent turnaround strategy is not viable, it may be that the business can still recover if the company is placed into administration. In such circumstances, the administrators may seek to sell the business and assets as a going concern immediately following their appointment (known as a pre-pack sale). Taking Wild Beer Co as an example, the business and assets were purchased from its administrators by Ashford-based Curious Brewery meaning the business was saved and the employees retained.

Placing the company into administration is not usually suitable if the business cannot be saved and so an alternative option would be to place the company into liquidation. Liquidation brings about the end of a company and the appointed liquidators will look to sell the assets so that a distribution can be made to the creditors.

Solvent liquidation

To end on a more positive note, it may be that you are able to pay off all of your debts in full, but you simply want to cease trading in order to realise the company’s assets. In such circumstances you may consider placing the company into Members’ Voluntary Liquidation (solvent liquidation). This would require you to swear a statutory declaration of solvency and the members would need to pass a special resolution to commence the liquidation and appoint a liquidator.

For further information on any of the issues raised in this article, get in touch with me at daniel.finn@brabners.com or another member of our Breweries and beverages team.