The first a creditor often hears of an administration is an
announcement in the press. That is even more so when the infamous
"pre-pack" is involved. This blog will cover exactly what
everyone is talking about when they mention pre-packs.
At the end of this note you will be able to answer the following
multiple choice question. Is a pre-pack in an administration:
(a) A quick, fair and logical way to save a business from
completely failing?
(b) A stitch-up between a tame accountant and the directors in
order to keep the assets and leave behind the debt and any unwanted
properties?
(c) A process with minimum control over what happens and how much
it costs?
(d) All of the above?
As mentioned in my
last blog, administration is now the norm for dealing with an
insolvent company. It should produce a controlled process which
benefits all unsecured creditors rather than just those who are
quicker off the mark.
Arguably however, the merest hint of administration will mean that
the business caused problems which will result in a worse outcome
than otherwise possible. The creditors will scramble to secure
their position; key employees may decide to jump ship; landlords
may attempt to forfeit leases or distrain on the goods on the
premises; customers may decide to shop elsewhere for whatever
product or services the company provides.
Instead, an insolvency practitioner is approached either by the
company or is recommended by the bankers of the company to be ready
to take the role of administrator and then immediately (i.e. same
day) sell the desired assets to a new entity set up and controlled
by the directors and/or shareholders of the failed company. Behind
the scenes there will be pre-preparation of documentation so that
the process can happen without any gap or external publicity.
Typically in a retail operation an appointment will be made on a
Friday, the disposal sanctioned by a court order which is sought by
the newly appointed administrator and then completed. The Monday
morning news breaks and the new entity can say that the business
has been saved and is continuing to operate on new capitalisation
and can fulfil all the old company's ongoing (but not previous)
commitments.
So when first the creditors hear of the appointment it is also to
hear that all the assets have been disposed of and a new entity put
in place to deal with the various parties who will have an ongoing
future relationship, an obvious class being the landlords of the
failed company's leases.
In my next blog, I will discuss how a property owner, typically a
landlord, would then deal with the new reality presented to it in a
pre-pack by the administrator and the new operating business.
Usually they will either be presented with the possibility of a new
tenant in occupation or an empty unit.
Anyone interested in the morality of the process can find
information and discussion on the web from the Insolvency Service
(the industry regulator) and the Insolvency Practitioner's
Association.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.