Case Study: Pre-Pack Administration for a Suffolk Recruitment Company

Another tale of fast falling sales in the recession of 2009. This small recruitment company had had sales of £900,000. It had fallen sharply though in 2009. We were approached by a large group of recruitment companies to buy this distressed company. The Suffolk business had built up liabilities to HMRC of £70-90,000 and circa £10,000 to other creditors and the landlord. but it had a good name and strategic importance for the future plans of the group.

KSAs Solutions (and their benefits) for ****** Recruitment Ltd and ABC Newco Ltd

Pre-pack Administration, to newly formed Joint Venture company
o ABC Newco Ltd 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 ****** Recruitment Ltd

• Cost of assets to be determined by RICS Valuer (value say 5k)
• Deferred consideration for asset purchase if required
• Newco will also acquire work in progress – placements made of £20,000 for say 50p in £1
• Debtors collected by ***** (Invoice Discounters) any balance goes to creditors post administration

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 director on running the new business

• Drive sales past break even, supported by professional team

o 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 vehicle

• 75% equity Mrs A
• 25% equity ABC Newco Ltd

o Possible small dividend to oldco creditors of 1-10%

Possible risks and downsides
o Directors conduct investigation for Oldco directors
o Possible security deposit required by HMRC for Newco (very unlikely in this case)
o New banking / factoring facilities required
o No guarantee Asset Based Lenders will agree to novate asset finance to newco
o NB: All insolvency processes carry risk for the oldco company directors
o Cost of administration, valuers, lawyers.
o Initial pre-administration advisory fee £4,500

• Administration fee will be collected from realisations post administration
• TUPE issues apply in Administration, all employees would be employed by newco
• The director 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

Timetable

Appointment of KSA to act as informal advisors to the company w/c 1st June 2009

Pre administration discovery phase 2 weeks

Petition High Court for Administration order say w/c 15th June 2009

From the above you can see we laid out a clear plan to close the old company down, sell the business to a newly formed company with strong management, access to central reporting and also investment from a large recruitment group. The plan was agreed by the company and the ABC Newco board.

Our IPs agreed to act as administrators and we set out the plan to pre-pack the business. 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.

All the remaining jobs were saved in this Suffolk business and the new company is still trading reasonably as at October 2010

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.
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Keith has personally been involved in over 30 Recruitment Company rescues! Keith has written for the Recruiter Magazine -Read the article here: Serious cashflow problem – all is not lost.