Oct 30 2012 By Mike Parkinson
Even good businesses have bad times, often through no fault of their own. A run of trouble can upend the best run enterprise.
Sometimes all it takes is a key
customer not to pay a debt. But firms can avoid the complete oblivion
of liquidation by opting to pre-pack their business instead.
This is a controversial arrangement which, in simple terms, means a firm is sold back to its existing owners by the administrator, wiping away all its debts and even unwanted contracts. Whilst the sale is taking place the business simply appears to carry on as if nothing has happened. Pre-packs raise eyebrows. It is often particularly galling for creditors, who view these resurrections as cynical ploys by company directors to avoid their debts and, to add insult to injury, remain in place within the 'new', re-born company.
My view is that some pre-packs are a necessity. We need them. It may be tough on creditors, but it is surely tougher if a firm goes bust. People losing their jobs, and all the attendant waste that goes with the full collapse of a potentially viable business is not good for the wider economy.
If pre-packs reward a
failed management team, it is by default rather than design. The
problem for any administrator appointed to sell a small or medium
sized businesses to benefit creditors is that the company may not
actually have a business to sell. For instance, it may have contracts
that immediately terminate on an insolvent event.
The administrator might also think it impossible to maintain customer confidence in a business which he is simultaneously trying to get rid of.
In this instance a
pre-pack makes sense. Quite often the only buyer for a company is the
original owner or group of directors, given the risks to the
credibility of the business from trying to carry as a going concern
whilst also desperately trying to find another saviour.
Administrators also know just how little second hand assets and poor
goodwill are worth, which is why original owners sometimes seem to be
getting their businesses back for a song.
None of this is to say that pre-packs are ideal, just why they happen – which is sometimes missing from media reports.
But trouble comes in
different shapes. A pre-pack is not necessarily the right way forward
for a firm in trouble. Another option is to enter into a corporate
Travelodge and Fitness First were able to survive by this method, in their cases by restructuring debts with landlords.
The voluntary arrangement only works for businesses strong enough to repay its debts, albeit at a reduced amount. It is not an option for weak or failing enterprises. It also requires the support of creditors, too, and they may anticipate a greater return from a sale.
But voluntary arrangements are becoming increasingly popular amongst struggling businesses, allowing them to restructure their debts and the ongoing business.
It is also possible to
exclude certain creditors from a corporate voluntary arrangement. For
example, a fuel supplier to a transport business might refuse to
support the ongoing future enterprise unless its historic debts are
paid in full.
The rules for setting up an arrangement would allow such a ransom supplier to sit outside the arrangement and be paid in full and not able to influence the success or failure of the vote on whether to allow the scheme to be set up.
Her Majesty’s Revenue
and Customs seems amenable to most propositions, and although there
is no one percentage of historic debt recovery which guarantees
acceptance by them, a typical figure sits somewhere between 30 and 40
Remember, a company’s bankers usually have their positions covered and they have first call on all the assets in an insolvency. There can be no voluntary arrangement without their permission.
The key to all insolvency options is timing. Options disappear fast the longer a decision is left.
Mike Parkinson is a
partner in accountancy firm Barnes Roffe of Cowley Mill Road, Uxbridge.