“Our company is really struggling but can be viable. So what is a pre-packaged administration sale? We have heard that it is a powerful restructuring tool but how does it work"?

Get expert quality advice on Pre-packs, we will make sure the process is compliant, correct and protects your interests, creditors interests and value for all!

If your business is facing huge problems and legal threats, there is a powerful, legal way of selling the business on to a third party, a "newco" or to the existing directors.

This is called pre pack administration sale.

Examples of the steps for pre-pack are as follows.

Step 1:

"Your Company Ltd" takes expert advice from insolvency practitioners or turnaround practitioners on its very poor financial position. It is likely the company has threats from landlords, HMRC for PAYE and VAT, the bank and many trade creditors. The directors are worried about wrongful trading and their personal risk. The business may have onerous contracts or too much property, too many employees and or lost market share/customers.

This advice should be thorough and a report prepared in writing for the board and possibly for the bank. All options such as company voluntary arrangement, trade sale, refinancing, administration, creditors voluntary liquidation and pre-pack administration.

If good reasons for pre-pack this option should be very carefully considered by the board of directors. If a decision is taken to go down this path a board meeting should be held and a resolution passed stating the company's board will consider the option in greater detail.

It’s likely the resolution will include the appointment of formal advisors either insolvency practitioners (IP), turnaround practitioners or accountants to act as advisors to the board.

Step 2:

If the plan is to sell the business (not the company) to a "newco" then a business plan for the newco must be drawn up. We recommend that this includes detailed profit and loss forecasts, cashflow forecasts and balance sheet forecasts. This will give an indication of working capital requirements. The proposed administrator will require this as evidence that the new company can be viable.

If the plan is to sell to an existing trading company, the IP will require copies of management information and accounts from that buyer. Again this is necessary to ensure the acquiror is viable and can afford any payments for the assets being acquired.

A qualified accountant should be contracted to provide this forecast pack in my view. My trained accountants and specialist forecasters can provide such a service.

Step 3: - Compliance issues.

Under insolvency practitioners guidelines (known as SIPS) the IP must market the business. Often this requires sending sales memos to a database of potential buyers, or the IP may place an advert on his website and/or a local or national newspaper. If he gets no interest or no indication of interest he can then sell to the newco or third party. If there is a lot of interest and several offers, beware your business could fall into a competitors hands! You may still be able to buy the business back, but the outcome is not under your control

For an example of this risk see this link to the Daily Telegraph How the door almost closed on a pre-pack (click link)

 

He or she will also have to get formal valuations of the assets, intellectual property and or goodwill of the insolvent company by RICS qualified surveyors. Generally any offer needs to be commensurate with such valuations.

At this stage if you and your colleagues are planning to buy the business you must be careful with regards to your personal position. As directors of the dying company you have a fiduciary duty of care to the company's creditors.

Starting "newco" can put you at risk of conflict of interest. It's likely that you will need separate legal advice on both companies. Best to talk to lawyers with insolvency and pre-pack experience. Contact Keith Steven for a list of good lawyers.

The IP will take advice from his lawyers as to compliance and risk. He may require this advice to be paid for along with his disbursements. Strictly speaking he cannot charge time costs in advance for the pre-pack work but he will charge for consultancy and fees.

WARNINGS?

Beware will your client's contracts or BANK allow you to pre-pack? (The current stand point of several clearing banks is no they won't support pre packing to the incumbent directors/shareholders).

Will your landlord(s) allow a new company to occupy their property? Are your suppliers prepared to supply a newco? Will your creditors be angry about this approach? Some readers may have seen negative media coverage of pre-packs is rising sharply, almost in line with the economy shrinking. In future we see many more people attacking pre-packs, especially creditors and the media.

Step 4: - Raising finance

You will need finance to fund the acquisition of the assets and business. There are many specialist lenders who can provide: factoring, asset based lending, loans and bank facilities. Some venture capital companies or angels may help fund the pre-pack as part of a “buy and build” strategy we have a number of contacts that can help with this.

Financing a pre-pack in 2009 is likely to be very difficult and will probably require personal guarantees from the directors for SME’s. Larger companies may find that the private equity and venture capital buyer, removes the directors as part of the pre-pack conditions.

Contact Keith Steven now on 07974 086779 or by email on keiths@companyrescue.co.uk if you need finance.

Once again the funders will require a detailed plan supported by forecasts, they will want to test the valuations, the possibility of making and funding a loss and how their security needs will be met. So it’s vital to get these built. Call us if you need that done.

Step 5

Assuming that you have raised the finance, the proposed administrator has satisfied his compliance requirements and the board of newco believe they can fund the acquisition, then its all systems go.

A contract is likely to be drawn up that appoints the proposed administrator formally. He will then initiate the pre-pack administration by contacting any floating charge holders like banks or lenders with security. If they have no objections (and often they are involved in funding newco) then he can proceed.

Beware some banks will NOT allow a pre-pack to a related party. RBS, HBOS and HSBC for example will not generally countenance a phoenix with/to directors /members of the failed company. So it may be necessary to take out the bank first.

Assuming all is approved then the administrator makes an application to Court stating his proposals. Almost immediately after that the business is sold to a newco or third party.

This can be done on a Friday night and by Monday the business is trading virtually uninterrupted. Having bought the company name, the "oldco" see its name changed to something else, like "Your Company (Realisations) Ltd".

 

 

Summary to the pre-pack administration guide.

Clearly, this is a short guide and there are many pitfalls - with good advisors, quality practitioners and lots of determination this can be a very powerful and actually pretty quick solution. But remember the warnings above and if you are with RBS, HBOS and HSBC as a bank it is my experience that they will, generally, not support a pre-pack to the existing directors and may indeed appoint their own administrator or receiver.

If you are interested in a pre-packaged administration you should seek proper advice, whilst considering company voluntary arrangement, administration plus CVA and refinancing options.

NEW UPDATE 12TH JANUARY 2009

Statement of Insolvency Practice (SIP) 16

The Insolvency Service has issued a statement saying it will use the new SIP requirements for administrators using this tool. This is called the Statement of Insolvency Practice 16. The SIP requires the administrator to report to creditors on their actions as follows.

Insolvency Practitioners should be clear about the nature and extent of their role and their relationship with the directors and officers of the insolvent company in the pre-appointment discovery period. Where they are instructed to advise the company, they should make it clear that their role is to advise the company and not to advise the directors on their personal position.

The directors should generally be advised to take independent legal advice, particularly if there is a possibility of the directors acquiring an interest in the assets in the pre-packaged new business or newco.

Practitioners must bear in mind the duties and obligations which are owed to the body of creditors in the pre-appointment period. They should be mindful of the potential liability which may attach to any person who is party to a decision that causes a company to incur credit and who knows that there is no good reason to believe it will be repaid, this could lead to wrongful trading issues.

When considering the restructuring or sale of the business or assets, the administrators should bear in mind the requirements of the Insolvency Act 1986. In administration these provide that:

• The administrator must perform his functions in the interests of the company’s creditors as a whole, and

• Where the objective is to realise property in order to make a distribution to secured or preferential creditors, the administrator has a duty to avoid unnecessarily harming the interests of the creditors as a whole.

Administrators engaged in a pre-packaged sale should therefore be able to demonstrate that they have considered the above. If creditors believe that their interests have not been considered they may complain to the Insolvency Service or the IP's regulatory body.

Where a pre-pack is used the following information should be disclosed to creditors in all cases, as far as the administrator is aware after making his or her enquiries:

• The source of the administrator’s initial introduction, in other words how did the case arrive on his desk.

• The extent of the administrator’s involvement prior to appointment and any marketing activities conducted by the company and/or the administrator.

• Any valuations obtained of the business or the underlying assets. We would always advise obtaining independent valuations.

• The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes in each scenario.

• Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration.

• Details of requests made to potential funders to fund working capital requirements and whether efforts were made to consult with major creditors

• Details of the assets involved and the nature of the transaction to newco

• The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration.

• If the sale is part of a wider transaction, a description of the other aspects of the transaction.

• The identity of the purchaser, directors and any connection between the purchaser and the directors, shareholders or secured creditors of the company.

• The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other company into which any of the assets are transferred.

• Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business.

• Any options, buy-back arrangements or similar conditions attached to the contract of sale.

 

In my belief the pre-pack to a connected party will be a difficult "sell" now to creditors, unless all of these issues are carefully considered and noted. Where a business is pre packed to a third party, independent of the directors and possibly even secured creditors, then it will still be a powerful tool.

The Enterprise Act 2002 and case law supports the use of the pre-pack sale but I also believe that in some cases this will be open to challenge, unless ALL of the issues above are considered and answered as part of the scheme. Other wise further pre packs could face challenge in court.

 

For further views and discussions on pre-pack administration why not visit our CompanyRescue Blog (click link)

 

To complain about the misuse of a pre-pack administration see this web page or call the Insolvency Service hotline on 0845 601 3546,

http://www.insolvency.gov.uk/howtocomplain/complainprepack.htm

 

 

So if you need urgent help - call us now on free call 0800 9700539 or email our advisors on info@companyrescue.co.uk

 

CompanyRescue offices can advise on pre-pack administration in London, Newcastle, Liverpool, Company Rescue Leeds, Company Rescue Birmingham, Company Rescue Edinburgh, Company Rescue Bristol, Company Rescue Stansted, Company Rescue Glasgow, Company Rescue Leicester, Company Rescue Southampton, Company Rescue Nottingham, Company Rescue Sheffield. Why not call now for help: 0800 9700539

 

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