Administration is a process whereby a Licensed Insolvency Practitioner takes control of an insolvent Company at the instigation of either its Directors or secured creditors. Whilst the Company remains in Administration it is protected from litigation and creditors attempting to retrieve or seize assets to improve their position. The reason for this is to allow the Administrator time to devise a plan to either try to rescue the Company, or at least achieve a better realisation of its assets than would be achieved in Liquidation.
Administration can allow a Company to continue to trade, thus preserving jobs and the business, whilst an attempt is made to find a purchaser for those assets. In some instances a “Pre-Pack” takes place. This refers to an arrangement whereby the sale of assets of the Company, or part of its assets, is negotiated prior to the appointment of an Administrator. The Administrator then enters into a sale agreement on or shortly after his appointment. There are strict regulations concerning Pre-Packs which are there to ensure that the best possible value is obtained.
Who can appoint an Administrator?
An Administrator has to be a Licensed Insolvency Practitioner. They can be appointed by:-
i. The Court
ii. By the holder of a qualifying floating charge [usually the Bank]
iii. By the Directors of the Company
iv. By the Shareholders of the Company
Purpose of Administration
The law sets out the only three statutory purposes of Administration. The Administrator of a Company must perform his duties with a view to achieving one of the following:
a. Rescuing the Company as a going concern;
b. Achieving a better result for the Company’s creditors as a whole, than would be likely if the Company were placed into Liquidation;
c. Realising property in order to make a distribution to one or more secured or preferential creditors.
The Administrator must perform his functions in the interest of the Company’s creditors as a whole, unlike an administrative receiver whose primary role is to secure assets for the debenture holder that appointed him. An Administrator must consider the impact of his actions on all of the different categories of creditors.
Appointing an Administrator
In practice the vast majority of appointments are either by the Directors of the Company or by a secured creditor with a qualifying floating charge (usually the Company’s Bank). If the Directors are making the appointment the procedure involved is relatively straight forward:-
1. A board meeting is held and the decision made to go into Administration.
2. Where there is a debenture holder with a relevant qualifying floating charge, that floating charge holder must first be given at least 5 business days written notice of the intention to appoint an Administrator. This is to give the charge holder the opportunity of either agreeing to the appointment or appointing their own Administrator.
3. Once the 5 business days have elapsed, or the debenture holder has indicated that they consent to the appointment, the Directors sign further appointment documents which are filed at Court and an Administrator is deemed appointed.
4. When there is no relevant qualifying floating charge, the Directors appoint the Administrators. The appointment takes effect once the relevant documents are filed in Court.
When is Administration appropriate ?
An Administration is appropriate where a Company is under significant pressure from creditors. For example, they may be looking to take enforcement action through the Courts; instructing a Bailiff to seize assets; or are looking to retrieve goods/vehicles/premises. Administration throws a protective shield over the assets of the Company. This is particularly appropriate where there is a solid core business that has a good chance of survival.
One of the keys to a successful Administration is the pre-planning that will take place between the Directors and Insolvency Practitioner. If the Insolvency Practitioner is looking to trade the Company in some form, they will want to ensure that cash flow forecasts demonstrate at least a break even situation. How the initial trading is to be funded is a major consideration.
We have found that Administrations work best where the Directors work closely with us in the vital first weeks following our appointment.
If you require advice on Administration, please contact us on 0800 012 6649.
Pre-Packs occur when the sale of all or part of the Company’s business or assets is negotiated prior to the appointment of the Administrator, with the sale taking effect on or shortly after the Administrator’s appointment. It has become controversial because the sale can take place before the creditors have had the chance to approve the Administrator’s Proposals.
Detailed guidance has now being provided to the Insolvency profession as to the steps they must take to report a Pre-Pack sale to creditors. It must be borne in mind that the Administrator’s role is to perform his functions in the interest of the Company’s creditors as a whole. This is true even in the pre-appointment period, when the Administrator is advising the Company not the Directors. If it is the Directors (which is often the case) who are seeking to purchase the assets by way of a Pre-Pack, they must be made aware that they need to seek independent advice. This would also cover the transfer of employees under the Transfer of Undertakings (Protection of Employment) Regulations. The Administrator is there to advise the Company and not the prospective purchasers.
If a pre-pack does take place there are detailed guidelines as to what information must then be released to creditors. This is so that the transaction is as transparent as possible. The Administrators must be able to justify why they have gone down this route to dispose of the assets rather than to advertise the business/assets on the open market.
The term “Pre-Pack” has become widely used in Insolvency circles. It is often wrongly assumed that in a Pre-Pack the Company’s assets or business are sold prior to the Administration. The term actually refers to an arrangement whereby the sale of all or part of the Company’s assets is negotiated with a purchaser prior to the appointment of an Administrator. Once appointed the Administrator then puts into place the sale either immediately on or shortly after his appointment.
The significance of this is that the purchaser will be acquiring the assets from the Administrator.
This is to be contrasted with the position where the existing Company Directors sell the assets prior to the appointment of an Insolvency Practitioner. That is not a Pre-Pack but rather a sale by the Company pre Insolvency. In that type of transaction there are considerable risks to the purchaser as the transaction could be overturned once the Company has gone into formal Insolvency.
What is a Pre-Pack for?
Pre-Pack Administration is useful if a business needs to maintain continuity and keep trading.
Will the Company’s Bank be made aware of the Pre-Pack?
Where the Company has granted a debenture over its assets, the debenture holder must be given 5 business days notice of the intention to appoint an Administrator. In practice, this means that discussions will take place with any debenture holder prior to the appointment of an Administrator. If a Pre-Pack is being considered, they will be made aware of it since it will affect when and how they will be repaid.
Is a Pre-Pack Business Advertised?
This depends on the nature of the business and the offer that is being made for the assets. Part of the process of valuing a business and its assets involves the use of specialist independent valuers who would be expected to confirm that the price obtained for the business and its assets is a fair one. It may be that they recommend some marketing to establish whether or not there is interest in the business from other parties.
Does the Purchaser pay a premium for a Pre-Pack Administration?
A Pre-Pack purchaser will almost certainly be paying a premium towards the Goodwill of the Business as they are purchasing the business as a going concern. It is to be contrasted with an asset only purchase on a Liquidation where you would not necessarily expect to see any payment for Goodwill because the business had ceased to trade.
Directors faced with a potential Insolvency and a desire to purchase all or part of the Business back are faced with a dilemma. Where can I raise the necessary funds?
The Directors will not always have sufficient funds to be able to finance the buying back of assets on a Pre-Pack Administration. Depending on the type of business that they have, it may be possible to raise funds to help with the purchase. At Lines Henry we have over 20 years experience in assisting Directors with Insolvency. Over that time we have built up a number of contacts in the finance industry.
Typically funding can be arranged in the form of Asset Finance on the plant, machinery and physical assets of a Company. In many cases it also be possible to arrange for invoice financing on the Company’s debtors which may assist in raising working capital for the new business.
In some Pre-Pack Administrations it is not uncommon for an invoice finance company to get involved prior to the Administration, taking over the Company’s existing book debts and then setting up a similar facility for the purchasing company that acquires the assets/business through the Pre-Pack. This can provide a continuity in debt collection and assist in cash flow for the new business.
Lines Henry can put you in touch with the companies that provide finance for hire purchase, lease, sale & leaseback and invoice finance.
How are employees affected by a Pre-Pack Administration?
Care should be taken when entering into negotiations regarding a Pre-Pack sale, effected immediately on, or shortly after, the appointment of an Administrator as the date negotiations began can have an effect on whether the employee claims will be payable by the Redundancy Payments Service or the purchaser due to the Transfer of Undertakings (Protection of Employment) Regulation 2006 (TUPE).
Whilst employees have protected rights in any form of insolvency, where the responsibility for meeting those obligations falls is a complicated matter which requires careful consideration. It cannot always be assumed that the Redundancy Payments Service will pay the employee claims as it may be that these liabilities have passed to the purchaser of the business.
Lines Henry always advise directors who are contemplating the purchase of assets/a business from an Administrator to seek independent legal advice on Transfer of Undertakings. The Administrator is not there to advise the purchaser but to deal with the insolvency.
Any employees who are owed wages, holiday pay, pay in lieu of notice and redundancy pay can claim these from the Redundancy Payments Services by completing Form RP1. The Redundancy Payments Services, if they accept liability, will only pay claims up to a certain level. If employees are paid more than this then they will have to make a claim in the Administration.
If you require advice on Pre-Packs, please contact us on 0800 012 6649.