Bad debts, falling sales, cash flow problems are you “wrongfully trading” ? Is a pre pack the answer?
Well, it’s not quite as simple as that. If your company is facing serious financial difficulty, you may have heard of wrongful trading, sometimes known ”trading whilst insolvent”. It’s a complex subject about which there are many myths and rumours circulating. And there are very serious consequences of continuing to trade when you know your business is insolvent. If you are unsure then you should take advice without delay.
Pre pack Administration attracts much attention in the media but is only one of a number of insolvency procedures available to struggling companies. It may not be the most appropriate for your company.
How does it work? A pre pack is where a buyer is lined up for an insolvent company’s business (or assets) before it goes into a formal insolvency process. It allows an administrator to quickly and confidentially sell a failing business before there is permanent damage.
Invariably, whilst potential purchasers are approached in advance and valuation exercises performed, little open marketing of the business is carried out. It can be sold to anybody but it is often existing management who are in the best position to move rapidly as little or no due diligence is required.
Critics often dislike the concept of existing management buying back the business, continuing to trade clear of the original debts in a new “phoenix” company. Unsecured creditors kept in the dark are understandably often suspicious of the pre pack procedure.
However, pre packs can be invaluable in keeping a business trading, saving jobs and providing a better return for some creditors compared to liquidation. Additionally, it enables the business to survive and retain some goodwill value.
So, if your business has cash flow problems and you’re worrying about wrongful trading Wilson Field can advise you. We can give you guidance which may help you. Help you to, not just to survive this recession, but maybe come out of it in a stronger position. Each situation is unique, and your company’s circumstances will dictate the best way forward.