How a pre-pack administration can save a business

How a Pre-pack Administration can save a business.
If you have a business that is facing great creditor pressure, including court summonses or statutory demands or visits from bailiffs, then it is possible to save a decent business (but not the Limited company shell) by selling that business to a "newco" possibly set up by the existing directors.
Following are the steps that need to be taken to place a distressed business into a pre-packed solution
Step 1:
A Company would take advice from an insolvency practitioner. We can recommend one if required. Directors may be worried about wrongful trading, which is continuing to trade when they realise that the company is insolvent and may not be able to trade out of that insolvency, thereby possibly incurring personal liability.
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, aadministration, creditors voluntary liquidation and pre-pack administration should be explored.
If there are good reasons for a pre-pack the option needs to be considered by the directors. If it is decided by the Board to enter a pre-pack administration 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. This would include a detailed profit and loss forecast, 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 purchaser is viable and can afford any payments for the assets being acquired.
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 the IP may hold, an advert on his website 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 offers, beware your business could fall into a competitors hands.
The IP will also get formal valuations of the assets, intellectual property and or goodwill of the insolvent company. Any offer needs to be commensurate with valuations.
At this stage if the directors are planning to buy the business they must be careful. Directors of a failing company have a fiduciary duty of care to the company and its creditors. Starting "newco" can put that at risk of conflict of interest. It's likely that separate legal advice will need to be taken in relation to both companies.
The IP will be unable to charge costs for pre-plan work but he may well charge a consultancy fee together with disbursements which may include those fees of other external professional advisors.
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. But this is likely to be difficult to raise and will probably require personal guarantees from the directors.
The detailed plans that you have prepared will enable those funders to make a decision on whether or not to support the new venture.
Step 5
If you can raise the finance, the proposed administrator has satisfied his compliance requirements and the board of newco believe they can fund the acquisition then it will be possible to move ahead.
A contract will 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.
Assuming all is approved then the administrator makes an application to Court stating his proposals. The business will be sold to a newco or third party almost immediately.
Summary
If you are interested in a pre-packaged administration you should seek proper advice, we can provide that advice and put you in touch with advisors we trust to smooth the process.