As we enter a new year, there’s always a focus on looking ahead. With a different take on this, our Restructuring and Insolvency Director, Shaun Walker, reflects on how historic lessons can be learned for today’s businesses.
What can a nineteenth-century railway company teach modern businesses?
The answer is a surprising amount – with early expansion, cash strain, and imperfect deals having turned the East Anglian Railway into a cautionary tale that still matters for directors, buyers, and creditors today.
The East Anglian Railway (EAR) was created by an Act of Parliament on 22 July 1847 through the merger of three small railway companies; a product of the mid-Victorian rush to build networks and capture traffic quickly. That period saw many small promoters and local lines trying to expand rapidly to connect towns and secure traffic.
Overextension, cashflow strain, and rising operating costs
The ambition of these railway companies was enormous, but so were the costs and the risks and this was no more evident than with EAR’s competitor, Great Northern Railway (GNR). EAR’s rapid growth ambitions, and some unscrupulous practices such as a competitor pushing for a line to Wisbech being completed to secure lease agreements despite the costs, left it exposed to construction and operating costs it could not sustain. Their depleted cash reserves were mostly because of having to spend heavily to bridge waterways such as at Fenland. Within a few years, the company was in serious financial distress and by 1850 the company’s property had been taken into the hands of the receiver. GNR for their part were seeking to acquire failing railways like EAR who had overextended themselves (although GNR itself was not immune to these financial pressures either).
EAR’s story sits inside a broader pattern of the era. Smaller railways frequently ran into cash problems and were absorbed by larger companies. Receiverships, leases, and takeovers were common outcomes as larger operators like the GNR and Eastern Counties Railway (ECR) consolidated routes to create viable networks and economies of scale.
Business insolvency before modern insolvency law
In EAR’s case, shareholder opposition and competing offers led to operational changes. ECR contested arrangements that came from EAR’s insolvency and ultimately took over operation of the EAR before later groupings created larger regional systems such as the London and North Eastern Railway (LNER).
The Insolvency of EAR was more of a rout than an organised winding down or rescue process. Although it had sold off land, stations, and various assets to avoid insolvency, by 1850, when the receiver was appointed, creditors tried to recover anything they could physically get their hands on, not just engines. In some cases, creditors put their own representatives on footplates of locomotives.
Why headline deal terms can mask operational risk
The receiver, for their part, leased operation of the line to GNR on terms, giving 60% of receipts to GNR. The lease looked like a pragmatic rescue. But, unfortunately, it did not secure all the practical rights needed to make the route work. GNR had running powers over parts of the neighbouring network but had not obtained rights over the short connecting spur at Wisbech, and ECR refused access between the two stations. Passengers and goods were forced to be transferred by horse bus while the dispute played out. That’s an awkward image, even if we are now used to bus replacement services, and it underlines how headline commercial terms can be hollow if they omit key terms and are not properly thought out in the rush to get a deal through.
Creditor rights, enforcement, and priority in insolvency
Despite the process being a bit of a jumble with creditors pulling anything that wasn’t nailed to the floor, creditors in the EAR saga were active and practical in protecting recoveries and far more ruthless considering the lack of formal insolvency regime compared with today. Nineteenth century enforcement remedies such as writs of execution, including fieri facias (the execution of a judgement debt), all formed part of the creditor toolkit, and the case of EAR saw the law solidifying the priority of the receiver over the enforcement and execution of judgment debt creditors. It also saw creditors stamping their nameplates onto locomotives to ensure liens could be enforced, something that is still done today by lien holders, although with less grandiose methods than steel plates.
How UK insolvency law and directors’ duties have changed
Today, the insolvency regime is much more sophisticated, and directors will be aware that their duties and obligations shift to ensuring that creditors are protected once insolvency is foreseen. Fortunately, there are a range of options available to struggling businesses, such as administrations, voluntary arrangements, restructuring schemes, and moratoriums, as well as more options for creditors besides having to place a representative in the back of a steam train, such as a creditors’ voluntary liquidation.
Key lessons for company directors, buyers, and creditors today
A nineteenth-century railway’s failure might not seem like it is relevant to today’s world (although the last steam train produced in the UK was the Tornado in 2008!), but with the same mistakes still being made today, it provides an historic and straightforward lesson for today’s businesses which can be succinctly summarised as follows:
- Directors should seek early cashflow advice from their accountants or insolvency practitioners to avoid overextension and unrealistic cashflow projections. Being on the lookout for high interest payments, falling margins, longer debtor or creditor days and/or late payments. In addition, unlike nineteenth-century railway companies, directors today have a range of insolvency options that are more effective at stabilising issues the sooner insolvency advice is sought.
- Buyers of distressed assets, either through an administration or otherwise, must ensure they are receiving good advice on the impact of the insolvency on the assets and businesses they may be purchasing. It is also important to obtain sound advice on the wording of the agreement itself.
- Creditors should combine legal remedies with pragmatic monitoring and early insolvency practitioner input to avoid any spillover from the loss of a customer, supplier, or critical assets. For many creditors, this could mean monitoring debtor ledgers closely for signs that their customers or suppliers are stressed. Even rumours of poor staff morale at a supplier could be an indication that it is under stress. It could also mean implementing solid retention of title clauses in contracts and perhaps putting their details on any assets they own (such as a nameplate on a steam engine).
Thank you for taking the time to read this article. At Mercer & Hole, we pride ourselves on being approachable and taking the time to understand the needs of the business, for the best outcome for our clients. If this article has prompted you to want to discuss any matters, please do not hesitate to get in touch with Shaun.
