It is a rare situation that a business is all bad. There are usually some good bits, some bad bits and some awful bits and a phoenix or ‘pre-pack’ company is a method of separating good from bad.
As a case study let’s imagine a company, we’ll call it ABC Co that is in financial difficulty.
The directors of ABC have creditors chasing them for money and large, historical debts to pay and they simply can’t see a way out.
Having said that ABC Co does have some great stuff going on. It has a brilliant workforce, a great brand, modern machinery and some valuable intellectual property.
On the downside, the former owners of the business signed the company up to a long-term lease which has become very expensive over time and has a couple of large debts that are very expensive to service.
The directors of ABC Co call in an Insolvency Practitioner (IP) who assess the state of the business and concludes that with things how they are the company has absolutely no chance of trading out of its current situation.
So how can the directors of ABC Co safeguard the jobs of the employees and continue the trading and good name of the company but free themselves of the debt?
The Insolvency Practitioner suggests looking at a pre-pack administration or ‘phoenix’ arrangement.
In this case, a new company or ‘Newco’ is set up by the directors and this buys the assets from the old company that the directors have identified as valuable and leaves behind the things that are less desirable.
It’s really important to stress that things have to be done in the right order and in the right way, just thinking that it is possible for one company to sell off its best assets and go into liquidation is a mistake. Once appointed liquidators have the ability to report to the court on incorrect behaviour by directors and can even get transactions reversed to return value to creditors.
The directors of ABC decide that they will ask their chosen Insolvency Practitioner to run the Phoenix process and once he has decided a good case can be made for a pre-pack he goes through required steps of putting ABC into administration.
The directors will be required to pass resolutions to give the power (and funding) needed for administration and the process is passed over to the IP, however, this isn’t the end of the Directors work.
They will need to arrange at least some funding for the new company and will also have to produce a business plan and cash flow forecast to prove to the administrator that the newco has a good chance of success. They will need to prove the viability of the new company and will also need to make it sufficiently attractive as a way of returning value to the creditors as it has to be remembered that there is always the slim chance of the assets being sold to the opposition.
All being well the IP will then run through the tasks required of them which culminates in the transfer of assets to the new company and the liquidation of the old together with the return of any funds to creditors.
For customers and employees, the pre-pack process can proceed with almost no impact whatsoever and when a business has a great brand and a loyal customer base this is really important. For other companies the value often lies in the Intellectual Property of either the ideas or its people and keeping the workforce onboard is key.
Company directors must take professional and qualified advice rather than assume that they can do a DIY pre-pack. The administration must be handled by a qualified and licensed Insolvency practitioner and inevitably this will incur costs. there will be legal costs and accountancy fees and it would be a mistake to think that a phoenix arrangement is a cheap option.
However, if there are some significant aspects of the business that the directors really want to hold onto then the pre-pack administration is a really good option to be explored.