Administration or Pre-Pack Administration Guide for Law Firms

If your law practice has severe cashflow problems and creditor or HMRC pressure is growing, it’s time to get support and advice on your options.

Its free to get initial advice from experts in turnaround and insolvency such as KSA Group who own this website. We have been rescuing, restructuring and selling law firms since 2003. Talking to experts (free) helps you understand this complex option and you will find it takes a lot of weight off your mind.

What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the management of Licensed Insolvency Practitioners who are appointed as administrators by the Court after an application (petition) to the Court.  The directors and or the secured lenders can appoint administrators through a Court process in order to protect the company, its assets and their position.

What happens when a company goes into administration?

Administration is a very powerful UK insolvency process for gaining control when a law firm, which can be a LLP or company has serious cashflow problems, is insolvent and facing possibly serious threats from creditors. For example HMRC may be threatening a winding up petition for non-payment of taxes, or failure to adhere to time to pay arrangements. Or a lender may be seeking to foreclose against the law firm. Finally, the SRA may be threatening to intervene in the law firms affairs.

The Court may appoint a licensed insolvency practitioner (usually at last 2 IPs are appointed) as an “administrator”. This places an immediate legal moratorium around the company and stops all creditors legal actions.

The administration must have a “purpose” and the Government encourages the use of company rescue mechanisms after administration.

The 3 purposes (or objectives) are as follows:

1). – Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)

Company rescue as a going concern – this is usually a  company voluntary arrangement. The company/LLP or partnership enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days.
2 Achieving a better result for the company’s creditors as a whole than would be likely if the company was to be wound up (liquidation).  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets.

3).  – Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority LINK?. Usually the business ceases trading and employees are made redundant.

Only if the first two options are deemed unattainable, can the administrator use this third option.

The law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint its own administrators over a company without notice if it thinks its money is at risk. Obviously a plan and good communication with the secured lender is essential.

How long does going into administration last?

It depends very much on the circumstances.  In a trading administration the administrators take on the employment contracts of the company after 14 days so it is desirable that the business is sold out of administration before that date. Or, more usually, the employees are made redundant before 14 days have elapsed in adminisatrion.

The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off. They must pay PAYE, VAT, NIC, suppliers and rents for example, whilst the company is in administration   If there are large amounts of money to collect in or substantial realiseable assets then they may trade for longer periods.  During this time they will need to report to the creditors at regular intervals.

What is a pre-pack administration or administration pre-pack sale?

The company prepares itself to enter administration and sell its assets to a new company (“newco”) or to an existing 3rd party company. The directors engage advisors to run the sales process.

The proposed administrators engage chartered surveyors as agents to VALUE the business, goodwill and its assets, this may include, debtors, brand, work in progress in a  law firm for example. They also engage insolvency solicitors to draw up the required contracts for sale, applications to Court etc.

After the agents have marketed the BUSINESS for a period of 2-3 weeks they report the proposed bids to the proposed administrators. He, she or they then choose the best bid to achieve objective 2 above.

Within a day or two the COMPANY files a notice of intention to appoint administrators and serves notice on the bank or secured lenders. Once the notice ceases or if the lender consents, the BUSINESS is sold, the assets are turned into cash and the old debts stay with the old COMPANY.

What will the regulators think?

Obviously the SRA will need to be closely involved BEFORE the pre pack or any form of administration process is begun. Only solicitor insolvency practitioners can act as trading administrators. There are very few such qualified solicitor IPs.  However we can act as advisors and then administrators if the process of pre pack is used. At all times though close liaison with the SRA will be required.

“Informed Client Consent”.

Should any form of sale of a law firm be planned, either in administration or liquidation  (or even a MA& process) you must obtain informed client consent. We can discuss this with you as part of our overall advice on restructuring. Do not act until you have taken insolvency advice from experts in law firm restructuring.

Administration is a very powerful, far reaching process that can protect the BUSINESS and is a form of business rescue, however usually the old company (oldco) is liquidated afterwards. Call Keith Steven on 07974 086779 to discuss how administration may, or may not work for your law firm.

Pre pack: Checks, Controls and rules.

The pre packaged administration sale used to be a very popular method of rescuing a business. However, there has been much media coverage of creditors’ dismay at seeing their “debt dumped” by a former customer. In response there is now much more regulation of the process particularly when a sale to connected [parties to the existing directors (or to the existing directors in a new company).

We can take you through the process of applications to the Pre Pack Pool and also introduce – pre pack evaluators to assist you with your bid. In addition we know the buyers of law firms who are active presently. They may or may not be interested in a purchase of the client files.

However, in advance of any meeting and issuance of engagement  letters our regulators and the Insolvency Service (part of HM Department of Business Energy and Industrial Strategy) require all insolvency practitioners to obtain know your client (KYC) and anti-money laundering (AML) identification documents for all directors and shareholders holding >25% of the shares to allow us to proceed to advise the company. We will require up to date ID information including a photographic ID, such as a passport or driving licence PLUS a home utility bill or bank statement for each person.

Got questions? For answers to all these questions read our guides or call us now on 08009700539.