19 May 2009
These difficult times have seen an increase in the pre-pack sale of businesses out of administration and undoubtedly we shall see more in the months to come. Colin Mills of The FD Centre, a leading provider of part-time finance directors to small and medium sized businesses, explores this procedure in more depth and asks if there are other options.
A pre-pack is a procedure whereby the sale of a business within an insolvent company is negotiated prior to formal insolvency. The deal is completed by an insolvency practitioner or administrator at the point of, or soon after, formal appointment of the administrator by the company. The Joint Insolvency Committee issued guidance notes, which have been approved by all of the relevant regulatory bodies, called Statement of Insolvency Practice (SIP) 16 partly in response to recent negative publicity.
Colin says: “There are benefits in a pre-pack to the business in that it provides continuity of the business thereby protecting goodwill and maintaining jobs and value, especially for service based businesses.” The current owner/manager is often best placed to be the purchaser.
A pre-pack avoids the company continuing to trade whilst insolvent, which could lead to the directors of the business being held personally responsible for the debts of the business. In cases where funding cannot be found to meet the company’s debt obligations to its creditors or the bank, it is quicker and cheaper, in terms of professional fees, than trading on in insolvency and it is often the only alternative to ceasing to trade and winding up the business.
The administrator (who will be a licensed insolvency practitioner) is an officer of the Court and so must be able to demonstrate that he acted in the interests of all creditors even though their interests can sometimes be conflicting; there is a commercial and legal balancing act to be performed.
Colin continued: “Where there are benefits there are often drawbacks. Under a pre-pack there is little time to buy-in other stakeholders and the administrator is restricted in terms of potential purchasers, it being impractical to do any overt marketing. There is often a need to strike bargains with ‘ransom’ creditors, such as the landlord or key suppliers, but creditors in general do not need to be consulted and are unable to approve the transaction prior to completion.
“This often leaves creditors feeling understandably aggrieved, spurring negative publicity. Worse still, suspicion may hamper the business thereafter. The creditors can theoretically apply to the Court to reverse the transaction, but the administrator will only do a pre-pack if he is confident that fair value was achieved and that trading on was not viable or too risky.”
Pre-packs are often quoted as the only alternative to ceasing to trade and winding up the business, but in recent years there has been an increase in the use of the company voluntary arrangement (CVA).
In a CVA the company negotiates a legally binding agreement with its creditors to pay off a percentage of the debts over a period of time. This agreement is monitored by a supervisor, again a licensed insolvency practitioner, who ensures that the company is keeping up with the payments negotiated under the agreement and then distributes the proceeds to the creditors, on a pro rata basis, at regular intervals. However, the directors will remain in control of the business.
Colin goes on to add: “Where our FDs are asked to step in as FD when a company has experienced a major loss which would otherwise sink the company, but in all other respects the trading performance is still good, this formal process is often proposed as it protects the company from its creditors taking action against it. The costs of a CVA can be significantly lower than an administration and your bank and ‘the tax man’ are generally supportive of this process.
“CVAs can be arranged by insolvency practitioners or companies specialising in this area. For the creditors, the major benefit of this solution is that at least they get some return and the company continues to trade. The drawback is that the sins of the past may yet return if management have not learnt their lesson.”
David Smellie, a partner in the corporate and commercial practice at B P Collins, concludes: “If there is a viable business and funding is available then a CVA will allow the existing directors to run the business with the aim of providing long-term gain to the shareholders, something that could otherwise be lost if the administration route was followed.
“The availability of a multitude of options - but the possibility of personal liability - means that the directors of companies who are in trouble need to obtain appropriate advice from an insolvency practitioner as soon as the problems arise.”
The FD Centre provides part-time finance directors for ambitious businesses helping them in all areas of strategic and operational financial management.
To find out more:
Visit www.thefdcentre.co.uk;
Email andrew.forster@thefdcentre.co.uk;
Call 0870 011 1499
The corporate and commercial team at B P Collins can be contacted on 01753 279022, by completing the online enquiry form or emailing commercial@bpcollins.co.uk.
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