For directors of businesses that find themselves in difficulties it can often feel that going into administration is the end of everything however in many cases there is another option – the pre-pack arrangement.
A pre-pack, commonly known as a ‘phoenix deal’ is a method of allowing the healthy parts of a business to continue, retaining jobs and making the best out of a bad situation.
Often firms can find themselves facing administration because of a high level of debt or due to contracts and other commitments that have subsequently become unsustainable. Although the company itself may be insolvent it is distinctly possible that either the underlying business itself or parts of the business may be highly profitable.
If we imagine a chain of restaurants with very high rents, it is possible that there will be some profitable locations and some that are not so. If the landlords of the buildings don’t agree to rent reductions then the company will simply fail.
In this case it seems unfair that hard working employees should lose their jobs and closing the doors can cause reputational problems, even if it is only for a few days.
A prepack administration isn’t suitable for all businesses.
The company concerned needs to have some underlying value. It may be that the firm owns some considerable assets such as machinery or vehicles that allow it to carry on its business.
At the same time the company must either be insolvent or contingently insolvent. This means that if certain events happen, and there is a likelihood that they will indeed transpire that the company will actually be insolvent.
The company also needs to have a reasonable chance of succeeding in the future possibly through utilising its intellectual property such as brand names or rights and it may also have employees that are specialists in their field that makes survival a likely outcome.
For directors who are considering this route it is vital that they take early advice. A pre-pack is a legal option that does not lend itself well to a DIY approach.
When the directors choose an administrator there will be a series of tasks that they will need to carry out. The administrator will look at the business, the history and how it got into difficulties. They will also want to look at the conduct of the directors and senior operational staff.
They will then form a view based on their findings as to what the best outcome is for the creditors of the business. If the directors (or a third party buyer) are able to show that the business is viable in a new legal entity then the administrator might well agree to a pre-pack arrangement rather than liquidation.
To be eligible clearly the business needs to have some assets of value that are worthwhile saving. So for example a service business might have a great brand or some valuable Intellectual Property that can be used in a new company to allow the trading style of the company to continue.
Alternatively a manufacturing business may have a whole factory set up that is modern and efficient and more valuable as a whole rather than broken up in a liquidation or a retail business may have a series of great sites that trade well and could be sold as a ready made business.
The next thing that the pre-pack needs is a plan.
It’s not enough to simply be the directors of the old business. The administrator will want to see that the potential owners of the new business have a clear and achievable plan to run a profitable and responsible business.
The administrator has a legal duty to investigate the conduct of the former directors and ensure that the pre pack isn’t just a method of evading debts. They’ll also look at who they are selling to and will be especially interested if the buyers are ‘connected parties’ such as friends or relatives of the former directors.
Another major step in the pre pack process is that the company must be marketed in accordance with the rules (SIP16) and the administrator is at all times charged with obtaining the best outcome for the creditors. They’ll be required to report to those creditors how they marketed the business and what criteria they used to select the winning buyer.
If the company is eligible to go through the pre pack process then the assets and at least some of the staff will be transferred to the ‘phoenix’ company and the business will continue in its new form.
A pre pack administration isn’t suitable for all businesses in distress but if your company can show some of the attributes above then it may be that you could start again.
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