What do directors need to know
As the tremendous Platinum Jubilee celebrations are completed and the UK gets back to business as usual, many companies are looking toward Summer with a mix of hope and trepidation.
Hope that things will improve in their sector and that they could say with confidence that things had returned to “normal”, but also with knowledge from the past two years that things can change very quickly and what was normal in 2020 is not in 2022 and won’t be again.
One example of how things have changed is the use of prepack administrations.
Thanks to various support measures such as bounce back loans and restrictions on winding up petitions, the use of administrations and pre-pack administrations have been greatly reduced in the past couple of years, but this could be about to change.
In the latest monthly insolvency statistics from the Insolvency Service, administrations have been in three figures for the third consecutive month and were 51% higher than in the corresponding month a year ago.
How is a pre pack administration different?
The biggest question to answer about pre pack administrations is usually the first one asked – how does it differ from a standard administration procedure?
It all comes down to the sale process.
In a pre-pack administration, the sale of the name, assets, intellectual property and every other essential component of the business is agreed prior to the commencement of the administration itself.
Once the administrator is appointed, this pre-agreed deal is completed sometimes without the business being advertised for sale at all.
Chris Horner, insolvency director with BusinessRescueExpert and who has personally overseen many pre pack administration deals, thinks there are advantages to this approach.
He said: “It might sound counterintuitive not to advertise the business for sale but there are good reasons why the administrator in charge could choose not to.
“Firstly they will reduce the associated administration expenses from having to fund a marketing and sale campaign, especially if there is a genuine buyer waiting right there to conclude the deal.
“Secondly, it will also maintain the goodwill of the business and keep strong relationships with customers and employees, as it will be completed with a minimum of fuss to ensure continuity and that the business can keep running as smoothly and normally as possible while the deal is concluded.”
Another element of pre pack administrations that is often misunderstood or misrepresented is the role of connected or linked parties in the sale.
This refers to people or entities with a previous connection to the business such as former management or any purchaser with a prior involvement in the company who is interested in its continuity and survival.
In most cases, a linked or connected party would be a good option to purchase the business as they have the knowledge and prior experience and affinity with the company to provide the best possibility of a successful recovery – which is in the interest of creditors after all.
There has been a recent change in legislation that impacts how pre pack administration sales can be concluded to connected parties. Now certain conditions have to be fulfilled before an administrator can legally complete a sale and dispose of company assets to linked or connected parties in the first eight weeks of a business entering administration.
These are either getting the prior approval of creditors – who have the ability to stop any proposed deal if they feel it isn’t the best option for them, or to commission a report from independent valuers who must agree that the deal being proposed is in the creditors’ best interest.
The valuer or ‘evaluator’, to give them their proper title in this scenario, has to be someone with professional indemnity cover and experience, understanding and familiarity with the process so they can properly understand the transaction and ultimately report that they are satisfied that the proposed deal for the assets and other factors are reasonable.
While the evaluator’s report is not legally binding, the administrator has to deliver a report to creditors and the Registrar of Companies setting out the basis for their decisions.
This means that getting the prior approval of the creditors before attempting to conclude any pre-pack sale is imperative. Not just for the deal to be concluded but also because it aids transparency and builds consensus early in the process, even if it could take slightly longer.
These new tweaks to the process will give creditors the formal say that some think they have been denied in previous deals and remind every party that ultimately, it’s the creditors interests that have to be protected and focused on in delivering the best value deal.
A pre-pack administration is just one of a range of insolvency procedures that can help a business survive and ultimately emerge stronger than before which will not only protect the interests of creditors but shareholders, employees and customers too.
If your business is facing financial difficulties then before making any important decisions you should get some advice from an expert – a BusinessRescueExpert!
After a free consultation with one of our experienced advisors, you will be in a better informed position to decide what your next move will be – and what the benefits of each course of action are too.