Phil MeekinView Profile
Bad debts, falling sales and cash flow problems are a nightmare for any business owner. If your company is facing serious financial difficulty, you may have heard of (and be worried about) “trading whilst insolvent”. It’s a complicated subject, about which many myths and rumours are circulating, and there are severe consequences of continuing to trade when you know your business is insolvent. There are several arrangements available for insolvent businesses, either allowing them to clear as much of their debt as they can afford, or, close the business if necessary. One of the most famous, and in some cases controversial procedures is pre-pack administration.
What is pre-pack administration?
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 it is permanently damaged. The buyer can even be a group made up of former managers and directors from the old company, potentially allowing the business to continue operating as if nothing has changed after the insolvency process.
This is also known as a phoenix company, one company dies, and another is born in the process. Although the new company can continue trading with the same suppliers and using the same customers, the one thing it can’t do is use the same trading name as the old company.
Will pre-pack solve my problems?
Well, it’s not quite as simple as that. Pre-pack administration attracts a lot of attention in the media, but it’s only one of several insolvency procedures available to struggling companies. Every business and situation is unique, and while the process may sound enticing, it may not be the most appropriate option for your company.
There is also strict regulation surrounding a pre-pack administration as an option. Administrators will not simply bend to the will of what the directors want, who may see a pre-pack as a golden ticket. An insolvency practitioner’s first and most foremost job is to maximise a return to creditors, so they will only use a pre-pack if they see a greater return to creditors than if they didn’t use the procedure.
Who’d buy an insolvent company?
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 directors who are in the best position to move rapidly as little or no due diligence is required. If the company still has a good name within the market, directors will often see this as the biggest asset.
What will the creditors think?
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 often, understandably, suspicious of the pre-pack procedure.
However, pre-packs can be invaluable in allowing a business to keep trading, saving jobs, and in some cases, providing a better return for some creditors when compared to liquidation. Additionally, it enables the business to survive and retain some goodwill value.
If your business is going through serious financial difficulty and is at risk of becoming insolvent, you should act as quickly as possible, so the situation doesn’t escalate further. One of the solutions which may be an option for you is pre-pack administration. This process allows the sale of the business’ assets to a third party, which can be made up of former directors or management from the insolvent company. While the process is infamously unpopular with existing creditors, who may view it as a ‘get out of jail free’ card, in reality, it can provide them with a more substantial return than a straight-up administration or liquidation.
If your business is struggling with debts that could put it into insolvency, contact our advisers for free, impartial advice with no obligation. We can assess your circumstances and decide the best way to get your business out of insolvency and back into the black.