Article / 2 Nov 2020

Net Assets: how 'pre-pack administrations' can save your business

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Gateley Legal

Welcome to the seventh piece in our ‘Building a resilient balance sheet for 2021’ series looking at solutions and opportunities for 2021 viewed through the balance sheet. So far, we’ve looked at options to restructure with creditor approval and participation.

There will be circumstances where this is not sufficient. The creditor overhang may mean that a company is balance sheet insolvent (where liabilities exceed assets) or cash flow insolvent (where debts cannot be paid when due). In the last financial crisis numbers of administrations doubled between 2007 and 2009.

What does ‘pre-packaged administration’ mean for a business?

Our last post looked briefly at the CVA where, if successfully implemented, a company can continue. Administration is also an opportunity to reshape and restart a business in a healthier form. It usually means the end of the corporate ‘shell’, but the business will often survive.

An administrator will generally try to sell a business as a going concern to maximise value. Following a discreet marketing process, a sale is agreed by the intended administrators in advance of their appointment, leading to a “pre-packaged administration”.

The positive and negatives of ‘pre-packaged administration’

These have attracted both positive and negative publicity with the government announcing legislative reforms to pre-pack administrations prior to June 2021. Creditors tend to get a better return through a ‘pre-pack’ than in other types of insolvency. Customers and suppliers often welcome the continuity of trading with the new company, writing off old debts, rather than lose a valuable customer. Employment continues and debts are more likely to be collected. But in any insolvency there are losers and creditors can feel deliberately discarded.

At this stage, directors must also be aware of their legal duties to consider creditors’ interests first and foremost. This is a time to be working closely with legal and financial advisors as personal liability can attach to directors who do not take their legal responsibilities seriously. But done properly administrations have proven a very effective rescue tool.

Our next post will look at the benefits (and potential pitfalls) of buying a business from administrators. Is it as good a deal it initially appears? How do you make a success of it?