There will be occasions when it is not possible to rescue a company or business without the use of one or more of the rescue options provided by the Insolvency Act 1986.
These procedures may be regarded as routes for saving the business, either within the existing corporate structure or via a sale to a new corporate entity, possibly via a ‘pre-pack’ sale. We can advise on which of the procedures is appropriate, and by initiating a dialogue with the relevant stakeholders (i.e. secured lenders, creditors, employees and customers) can ensure a successful implementation.
The administration procedure provides an insolvent, yet viable, company with a period of protection during which time creditors may take no action against the company without leave of the Court. This ‘breathing space’ allows the administrator and the directors to take stock of the company’s position and formulate a strategy for the way forward which could include a Pre-Pack process. The Enterprise Act introduced new purposes for an administration, and an administrator must now perform his functions with the objective of:
- Rescuing the company as a going concern; failing which
- Achieving a better result for a company’s creditors as a whole than would be likely if the company were wound up; failing which
- Realising property in order to make a distribution to the company’s secured or preferential creditors
These alternative purposes are listed in the order they must be considered by the administrator. For example, if the administrator believes it is not reasonably practicable to achieve the first purpose, the second purpose will apply, and so on. Once a company enters administration, the management of the company is placed under the control of the administrator, although we would try to use the expertise and experience of existing directors and staff when continuing to trade and in formulating the exit strategy. The most usual outcomes for a company in administration are the return to solvency via a company voluntary arrangement (“CVA”), or the sale of the company’s business and assets as a going concern. In both circumstances the business is preserved and a better return for stakeholders is achieved.
A pre-pack sale of the business and assets of the company to a third party or existing directors, is a legal process which can ensure the continuity of the business and can often be the best outcome for creditors. It will also mean that debts remain with the old company and it would also allow any unprofitable or onerous contracts to be terminated. Depending on the circumstances, employees may be transferred to a new company. Following a consultation process launched by the UK Government in 2015 any such intentions of a pre-pack sale should also be reviewed by a Pre Pack Pool. This has been introduced, along with a strict code of practice (Statement of Insolvency Practice 16). This ensures that the process is transparent and that preliminary marketing and professional valuations are undertaken. This is to ensure that assets are not sold at an undervalue. Furthermore, if appropriate, discussions will also be held with key stakeholders such as major trade creditors, finance providers or HMRC.
Administration followed by a CVA
As stated above a possible outcome following the appointment of an Administrator is that the company will enter into a CVA process.
Whilst the Administration is in place creditors are prevented from commencing or enforcing legal action without the leave of the Court.
The role of the Administrator is to work with the Directors and key stakeholders such as major trade creditors. The aim is to produce a proposal to creditors that will be approved and allows the Administrator to hand back control of the company to its Directors.