Case Study: Pre-Pack Administration for a Recruitment Company

10 March 2011

As licensed insolvency practitioners we are never really shocked at the things we hear and see. However, the scale of the fall in sales in this London based recruitment company was stunning.

From sales of £3m pa and making £250,000 net profit in 2007-8 financial year, this business was hammered by the recession and saw sales fall to under £600,000 pa, making a loss.

The legacy debts to HMRC were much too big for the now smaller company to repay and the directors were like rabbits in the headlights. How could the company repay hundreds of thousands of tax debts, get rid of a lease on a too-big office and keep the business functioning? They had let most of the 25 recruitment consultants go keeping the most productive sales people, so costs were now lower but the ball and chain of the debt remained.

KSA considered a CVA solution first for this business but the CVA would have been difficult enough when a winding up petition was threatened and delivered by a supplier. A third party also had approached the directors offering to assist and fund the business in future. The deal was the third party investor would look after the financial reporting, offer space in its own offices and provide guidance to the management. The plan was for a new smaller business with nil debt and the "oldco" directors would be shareholders in "newco". After being dragged down emotionally by the debt pressure, this was too good an offer to refuse.

The third party investor recognised the skills of the directors and the retained sales consultants, along with a good client base. It is a national consolidator of recruitment companies and as such wanted to buy the business without the risk of taking on the debt in a CVA.

Our IPs agreed to act as administrator and we set out the plan to pre-pack the business. Now many readers will be aware that there is a stigma attached to pre-packs, many commentators (including Newsnight's Jeremy Paxman!) have attacked pre-packs as scandalous. Yet the Government wants to see businesses survive especially in this recession, the Enterprise Act, actively encourages Company Rescues. So the key to pre-pack administrations is to DO IT PROPERLY from the outset.

Under Statement of Insolvency Practice 16 (SIP 16) the process is carefully controlled by the Insolvency Service and its vital to do it properly or the Insolvency Practitioner and directors of oldco can face attack by creditors. So our plan always sets out to comply with SIP 16 and best practice. Here is the suggested solution recommendations we set out for the client.

KSA Group - Proposed Pre-Pack Administration Solution for "Oldco Ltd"

o Third party investor will support new company (newco) with

  • Non executive directors, centralised procurement,
  • High quality financial management

o Directors of (oldco) can move across to a professionally managed company
o Newco will acquire Goodwill, trading name and assets of oldco

  • Cost of assets to be determined by Royal Institute of Chartered Surveyors (RICS) Valuation
  • Deferred consideration for asset purchase as required
  • Newco will also acquire work in progress - for say 33-50p in £1
  • Debtors collected by invoice discounters any balance goes to creditors post administration
  • New factoring facility required 

o Removes creditor pressure, oldco either liquidated in future or dissolved
o Short preparatory period, very swift execution period
o Clients and candidates largely unaffected or aware
o Refocus oldco directors on running the new business

  • Drive sales past break even, supported by professional team 
  • Initial new board remains in control until post creditors meeting (3 months)
  • Oldco directors join board of newco post creditors meeting

o Shareholders have clean vehicleo Possible small dividend to oldco creditors of 1-10%Possible risks and downsideso Directors conduct investigation for Oldco directorso Possible security deposit required by HMRC for Newco (unlikely)o New banking / factoring facilities requiredo No guarantee Asset Based Lenders will agree to novate asset finance to newcoo NB: All insolvency processes carry risk for the oldco company directorso Cost of administration, valuers, lawyers.o Initial pre-administration advisory feeo Administration fee will be collected from realisations post administrationo TUPE issues apply in Administration, all employees would be employed by newcoo The directors may have a conflict of interest with regards to oldco and newco issues and may need to consider obtaining independent legal advice on this issue

The business was sold to the newco funded by the third party investor and is trading well. A small dividend of 7p in £1 was returned to creditors thus ensuring a better result for the creditors than a simple creditors voluntary liquidation.

We are experts in business rescue, corporate rescue and company rescue, we can help investors, shareholders, sole traders, partners and directors with pre pack administration solutions.
Keith Steven the MD of KSA Group has written for the Recruiter Magazine. Please read his article on Serious Cashflow Problem? - All is not lost!

Categories: CVA