Melania Constable and Jessica Williams explain what the collapse of the three trading entities in the Converse Pharma Group could mean for the entire industry…
The collapse of the three trading entities in the Converse Pharma Group (Testerworld Limited, Doncaster Pharmaceuticals Group Limited and Eclipse Generics Limited) (the Group) undoubtedly caused ripples in the community pharmacy industry in May 2022.
The Group, a major supplier of medicines, had combined sales of more than £300 million, employed 1,000 people and supplied more than 4,000 pharmacies across the country.
The Group is licensed and regulated by the MHRA. In early 2021, a violation of MHRA licensing rules brought a temporary (but long-term) halt to trade.
The Group was able to secure continued support from its secured creditors during this period, but when the licenses were subsequently reinstated, there were limitations.
Unfortunately for the Group, the period of the suspension and the subsequent restrictions on the licenses caused a significant drop in revenues from which the Group was unable to recover.
Finally, in May of this year, the Group’s companies had exhausted their working capital and had no prospect of raising the financing they needed to continue trading.
The companies were placed under administration and individuals at Kroll were appointed as administrators.
What does administration mean for the pharmacy industry?
When a company enters the administration, a trustee is appointed as administrator of the company.
The administrator takes control of the company’s affairs and assets from the directors of the company.
The administrator must achieve one of three statutory objectives in an administration.
The primary goal is to save the company as a going concern (the First objective).
Where this is not possible, the appointed administrator will strive to achieve a better result for creditors as a whole than would be likely in the event of liquidation of the company (the Second objective).
However, if that is not reasonably possible, the third and final object will be to realize some or all of the Company’s property to make a distribution to one or more secured or preferred creditors (the third objective).
In the case of the Group, Kroll, acting as administrators of the Group, has confirmed that they do not expect the First Objective to be possible.
Instead, the administrators will attempt to pursue the Second Objective through a possible sale of certain activities and assets of the companies in the Group or, failing that, will attempt to achieve the Third Objective by collecting the debt books of companies .
While some of the companies coming into administration will continue to trade (under the direction of the trustees), in this case the trustees have confirmed that the companies will stop trading immediately and instead the trustees will take steps to terminate the companies immediately.
It is no easy task to phase out pharmaceutical suppliers on this scale.
As a result of the companies not continuing to trade, the vast majority of the workforce has been laid off (although a few individuals have been retained to assist the administrators in winding down the companies).
The trustees will also need to liaise with regulators, the management team and the secure lenders for the companies.
The administrators will seek to maximize recoveries for the benefit of the companies’ creditors.
In this case, the trustees have confirmed that there will not be a full sale of the company, but they have stated that they will seek to sell some of the business, assets and pharmaceutical inventories.
What does this mean for the group’s debtors?
As part of their statutory duties to collect and realize the assets of the companies, the trustees will verify that all debtors of the companies have paid the amounts owed in full.
The administrators have confirmed that the accounts receivable book for the companies is one of the largest assets they will seek to recover and that such debts also include wholesale and independent pharmacy customers operating in the UK.
For Testerworld, the outstanding balance is over £32 million.
Pharmacies indebted to any of the companies should not view the collapse of the companies as a possible “prisonless receipt card” for outstanding payments.
While it may take time for administrators to review the companies’ books and records and identify pharmacies that still owe money, a claim for outstanding payments is inevitable.
If invoices remain unpaid after the hunt, the trustees shall be free to initiate proceedings against the debtors to recover the amounts owed and/or to negotiate a settlement or settlement of such claims if deemed appropriate .
It would therefore be unwise for a pharmacy to ignore notices from administrators or their legal representatives.
What does this mean for the group’s creditors?
After entering into the Group’s administration, it will enjoy the protection of a statutory moratorium limiting the ability of creditors to enforce their claims against the companies.
This means, for example, that a creditor cannot initiate or continue legal proceedings against the companies without the prior consent of the administrators or the court.
This suspension of payments offers the company in administration a “breathing room” in which the administrators can carry out their necessary activities to achieve the statutory purpose of the management.
Creditors of the companies hope the administrators have cash in the bank to facilitate the payment of dividends to creditors.
At this point, however, the trustees have indicated that there is uncertainty as to whether there will be sufficient equity to allow a distribution to unsecured creditors.
Undoubtedly, further information will be provided by the administrators regarding the prospects of a dividend to creditors as administration progresses and as soon as it is known whether a sale of the business and/or assets will be feasible.
Those who believe that they are creditors of the companies, but who have not received a copy of the progress report directly from the administrators, should contact the administrators and inform them of their possible claim in the administration(s). by submitting a debt certificate form.
It is important to ensure that the administrators are aware of all claims so that they can ensure that such creditors are kept informed of the progress of the respective administration(s) and, when and when the time comes, to enable such creditors to participate in any dividends.
The above is a general overview and we recommend that you seek independent legal advice for your specific concerns. If you would like further information regarding the points raised in this article, please contact Melania Constable or Jessica Williams, attorneys at Charles Russell Speechlys LLP in the Corporate Restructuring and Insolvency team. Melania can be reached at: [email protected] and Jessica can be reached at [email protected]