When a business is suffering financial difficulties, it may be advisable to place the company in Administration - a legal process that requires the appointment of a licensed insolvency practitioner as Administrator.
Increasingly the process of Administration is used as
part of restructuring a business enabling the business to buy time to
deal with historical difficulties that may be preventing the business
from moving forward. When an administration order is in place, a
protective cloak is placed around the company during the period in
which the order is in force, giving it protection whilst a survival
or an orderly wind down of the company’s affairs is being achieved.
The process of appointing Administrators has been much simplified since the introduction of the Enterprise Act 2002, giving the directors and shareholders the option to appoint Administrators by a process of filing a Notice of Intention to Appoint Administrators at Court which is then served upon any party holding a Qualifying Floating Charge, which will ordinarily be the Company’s principal financer, who must then approve the appointment.
Upon filing of the Notice of Intention a moratorium is created over the Company preventing any third party from commencing legal action against the Company or continuing any existing legal action without express permission. This time is critical in providing the Company with the breathing space required to discuss and agree a way forward with the nominated Administrators to try to enable the business to survive.
One option to be considered is a process described as a Pre Pack Administration. The directors and shareholders may use this time to negotiate with the proposed Administrators for the purchase of the assets and goodwill of the insolvent Company. The Administrators are required to act in the best interests of the general body of creditors and in fulfilling this duty will be required to take control of all property belonging to the Company with a view to realising the best possible value for the benefit of the creditors. In doing this the Administrators will instruct agents to provide a report as to the likely realisable value of the assets and advise on the best way in which to maximise value in all the assets available.
It will often be the case that the best way in which to realise assets will be to sell the assets, business and goodwill in one single sale. However, due to the inability of the Administrators to fund any ongoing trade and therefore having little or no time available to them for advertising the business, the only likely purchaser may be the existing management. This is particularly effective where the value of the business can be very quickly diminished if customers do not receive continuity of service or supply.
The advantage to the existing management in undertaking this process is that they will be left in a position whereby they are able to retain the viable core business of the Company. By transferring the core business to a new Company, the historical liabilities incurred in the previous Company will remain in the old Company allowing the management to concentrate on the future growth of the business.
As part of the Pre Pack Administration of the Company the existing management will also have the ability to only purchase the elements of the business that they wish to trade forward. For example the Company may have long leases for premises which they wish to move out from or contracts with suppliers or customers which are no longer viable. These can be discontinued and left in the old Company.
The process of Pre Pack Administration is a matter for much debate within the Insolvency industry with concerns raised as to the potential for abuse of the process by directors seeking to purchase a business at an advantageous price and simply avoid payment of creditors. However, when undertaken in appropriate circumstances and carried out in a professional manner for a fair and full value it remains a procedure by which a potentially successful business can be saved, protecting employment for the staff. It is certainly an option to be considered.
Whilst taking steps to place a Company into Administration is not a decision that should be taken lightly by a board of directors, it is important that they understand that the commencement of an insolvency procedure can be an effective business decision that can allow a viable business to survive the difficulties being faced, rather than fail leading to maximum damage to all its stakeholders.
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- Prevents anyone presenting a petition to wind up the company
- Prevents any creditor from enforcing security over the company’s property or to repossess goods in the
company’s possession under any sale or hire agreement.
- No other proceedings, execution, or legal process may
be commenced or continued and no distress may be levied
against the company or its property.
- There are severe cashflow pressures but there is still a good business to preserve.
- There is a requirement to quickly sell on the business of a technically insolvent company
- It simply isn’t possible to persuade creditors to agree out of court or through consensual means to an alternative course of action (such as restructuring).
- Agreement is not possible within a manageable timescale.
- The company is insolvent and the directors are concerned about the risks of wrongful trading.