Our company is really struggling but can be viable.
So what is a pre pack administration sale?
We have heard that it is a powerful restructuring tool
but how does it work?"
The main advantage of prepack administration is continuity of the "business" and when the plan is ready and a contract of purchase is drawn up, the company is quickly protected by the Court while the administrator sells the "business and assets" (not the actual company) to the new owners. This gets rid of debts, unwanted or onerous contracts, and employees (in certain circumstances there could be TUPE issues that need to be addressed) and there need be no interruption to the business, which in itself can destroy value.
Another big advantage is that the cost of the process is lower than some other options, as the administrators do not need to find funding to trade the business. The process, including the preliminary marketing, valuation work and discussions with creditors, can be very quick and done in a couple of days if necessary.
If the business is to be sold to a connected party, i.e. the former directors, they will need to be able to fund the acquisition of the assets. However, the assets will need to be independently valued.
Of course, a prepack can generate negative publicity if the former directors are seen to be shedding liabilities. However, it should be remembered that the business was already insolvent prior to any appointment and a protracted process ending in liquidation could have been the alternative, with the loss of many more jobs. Following controversy, the UK Government launched a consultation process on reform to the pre pack administration process and decided that no change is necessary. They are looking into it again and are expected to report at the end of August 2013.
Have a look at the steps set out below or perhaps you might find that our recently revamped flowchart of the prepack administration process helps.
For more information take a look at our administration pages
or you can read our case study of a pre pack administration for a London IT Company
Why not call now for help: 0800 9700539 or if you need urgent help call Keith Steven on 07833 240747
We are experts in business rescue, corporate rescue and company rescue, we can help sole traders, partners and directors.
Step 1"Your Company Ltd" takes expert advice from insolvency practitioners or turnaround practitioners on its very poor financial position. It is likely that 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 must be considered as part of the SIP 16 rules (see step 3).
If there are 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 advisors either insolvency practitioners (IP), turnaround practitioners or accountants to act as advisors to the board.
Step 2If 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 issuesUnder 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 their website and/or a local or national newspaper. If they get no interest or no indication of interest they 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 competitor's 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)
The IP 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.
If your company reaches this stage and 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.
Beware. Ensure that the pre pack process can be carried out under your current client contracts, and your connections to the bank. (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. In future we see many more people attacking pre-packs, especially creditors and the media.
Step 4You 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 2013 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 us now on 01289 309431 or contact Keith Steven by email on email@example.com 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 5Assuming that you have raised the finance, the proposed administrator has satisfiedtheir 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. They 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) thenthey 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.
A number of high profile companies have used this procedure recently. Gatecrasher Night Clubs, Internacionale, TLE, Dreams, Seymour Pierce, A Suit that Fits,Ward Lovett, United Carpets .Many others arelooking at it as anoption.
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".
Be careful about TUPE issues
TUPE is the acronym for Transfer of Undertakings (Protection of Employment ) Regulations. The idea of TUPE is to ensure that if a business is sold to a new owner then the employees are protected and their contracts are honoured by the new owner. In theory the newco will need to take over all the employment contracts which might make cost cutting difficult. However, the law is quite fluid on this point and we would advise that you take legal advice on this aspect before considering on this course of action.