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Friday, 25 July 2008

Laymans guide to pre-packaged administration sale

I was asked to explain pre-packaged administration sale the other day in laymans terms. We have published a new page for this today at http://www.companyrescue.co.uk/company-rescue/options/pre-pack-administration

If your business is facing huge problems and legal threats, there is a powerful way of selling the business on to a third party, a "newco" or to the existing directors.

Examples of the steps for pre-pack are as follows.

Step 1:

"Your Company Ltd" takes expert advice from insolvency practitioners or turnaround practitioners like us! on its very poor financial position. It is likely the company has threats from landlords, HMRC for PAYE and VAT, the bank and many trade creditors. The directors are worried about wrongful trading and their personal risk.

The business may have onerous contracts or too much property, too many employees and or lost market share/customers.

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, administration, creditors voluntary liquidation and pre-pack administration.

If good reasons for pre-pack this option should be very carefully considered by the board of directors. If a decision is taken to go down this path a board meeting should be held and a resolution passed stating the company's board will consider the option in greater detail.

Its 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. We recommend that this includes detailed profit and loss forecasts, 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 acquiror is viable and can afford any payments for the assets being acquired.

A qualified accountant should be contracted to provide this forecast pack in my view. Our colleagues at the FD Centre Ltd can provide such a service.

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!

He or she will also get formal valuations of the assets, intellectual property and or goodwill of the insolvent company by RICS qualified surveyors. Clearly any offer needs to be commensurate with valuations.

At this stage if you and your colleagues are planning to buy the business you must be careful. As directors of the dying company you have a fiduciary duty of care to the company and its creditors. Starting "newco" can put you at risk of conflict of interest. It's likely that you will need separate legal advice on both companies.Best to talk to a lawyer with insolvency experience.

Contact Keith Steven for a list of good lawyers.

The IP will take advice from his lawyers as to compliance and risk. He may require this advice to be paid for along with his disbursements. Strictly speaking he cannot charge time costs in advance for the pre-pack work but he will charge for consultancy.

WARNINGS?
Beware will your client's contracts allow you to pre-pack? Will your landlord(s) allow a new company to occupy their property? Are your suppliers going to supply a newco?

Step 4: - Raising finance

Look 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.

Once again the funders will require a detailed plan supported by forecasts, they will want to test the valuations, the possibility of making a loss and how their security needs will be met. So its vital to get these built.

Step 5

Assuming that you have raised the finance the proposed administrator has satisfied his compliance requirements and the board of newco believe they can fund the acquisition then its all systems go.

A contract is likely to 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.

Beware some banks will NOT allow a pre-pack to a related party. RBS for example will not countenance a phoenix with/to directors of the failed company. So it may be necessary to take out the bank first.

Assuming all is approved then the administrator makes an application to Court stating his proposals. Almost immediately after that the business is sold to a newco or third party.

This can be done on a Friday night and by Monday the business is trading virtually uninterrupted. Having bought the company name the "oldco" see its name changed to something else, like "Your Company (Realisations) Ltd".

Summary
Clearly, this is a short guide to a vrey complex situation and there are many pitfalls - with good advisors, quality practitioners and lots of determination this can be a very powerful and actually pretty quick solution. But remember the warnings above and if you are with RBS as a bank it is my experience that they will not support a pre-pack and may appoint their own administrator or receiver.

If you are interested in a pre-packaged administration you should seek proper advice, whilst considering company voluntary arrangement, administration plus CVA and refinancing options.


So if you need urgent help - call us now on free call 0800 9700539 or email our advisors on info@companyrescue.co.uk

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Many thanks for your comments. If you have a private business problem and you want advice give us a call on 0800 9700 539 or email me at keiths@companyrescue.co.uk. If you are a professional advisor with a troubled client, please suggest they visit www.companyrescue.co.uk or contact me as above.

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