Tony Mitchell
Tony's recent articles
- Retention of Title - 34 years Old and Counting
19th August - Taxing Times For Dodgy Directors
17th June - Right First Time
15th April
Pre-Pack Administrations - Part 2
28th February 2009 11:32
In January, I raised the issue of whether Pre-Pack Administrations are commercially acceptable or are they simply an abuse of process. I also asked the question as to whether a Pre-Pack Administration could ever be justified and concluded that I believe that they can be justified in certain circumstances.
In this month’s blog I want to outline how a Pre-Pack Administration can be done for the benefit of all stakeholders.
Let us first consider the circumstances in which a Pre-Pack Administration is discussed. It is going to be at a time when a company is in severe financial difficulties and creditors are screaming for their money. Cash flow is non-existent and there is no further funding available. The point here is that creditors are already facing the high probability that they are not going to be paid the money they are owed.
In many situations where there is an underlying viable business, it makes economic sense to negotiate a sale of the business prior to the appointment of an Administrator with the sale affected immediately on, or shortly after, his appointment. By doing this there is no break in trading and there is continuity of supply to customers. Why is this important?
If an Administrator is appointed and only then sets about identifying a purchaser for the business, he is faced with the task of keeping the business trading, funding that trading and retaining the goodwill of customers who will immediately be looking to source supplies elsewhere. How long is the window of opportunity to find a buyer? – it may be as little as one week.
By negotiating a sale in advance, the Administrator secures a greater value for the business and assets than would be achieved if the business were closed, ensures future employment for a majority of the employees and results in a business continuing to trade, buying goods and services from suppliers.
The benefits are obvious to all stakeholders but creditors must recognise that in these circumstances they were going to lose the money owed to them due to the insolvency of the debtor but by the business being sold on, they have the opportunity to retain a customer (dealing on a cash only basis no doubt) and rebuild the relationship which has naturally been damaged. Every business owner knows that it is more economical to keep an existing customer then to find new ones.
Under new guidelines issued to Insolvency Practitioners in January 2009, we have a duty to keep detailed records of the reasoning behind the decision to undertake a pre-packaged sale and should be able to explain and justify why such a course of action was considered appropriate.
We must perform our duties in the interests of the creditors as a whole and to avoid unnecessarily harming the interests of the creditors as a whole. Importantly, we must provide a detailed explanation to creditors as to why a pre-packaged sale was undertaken and this information should be provided with the first notification to creditors.
To lose money is never a happy experience but creditors must recognise that a Pre-Pack Administration may increase the prospects of receiving a dividend and gives the opportunity to continue to do business in the future.
