By Lawrence Wood, Group Head of Credit & Risk, Ultimate Finance

 

With continued economic uncertainty, there is a high expectation that the global COVID-19 pandemic could result in one of the largest waves of insolvency in recent times. Supporting businesses fighting for survival through corporate restructuring has Government backing through reforms in legislation. Often referred to as ‘pre-pack administration’ it is part of an insolvency procedure; it offers business owners a powerful and legal way of selling the business assets to a trade buyer or third party.

Where businesses fail due to an historic and inherent flaw within their operations the hard line view could be taken, as in, ‘fair enough, it was always going to happen’, but for a business that has been underlyingly successful historically it does not seem right nor fair.  At a macro level, the Government wants to keep the economy going and the changes to the much talked about Corporate Governance and Insolvency Bill 2020 (gov.uk) are an attempt to help solve the problem by offering some breathing space to maximise any chance of survival e.g. suspension of wrongful trading and restriction on presenting a winding-up petition.

Since the start of the pandemic and lockdown, the Government have introduced several initiatives to help combat and support UK business such as Coronavirus Business Interruption Loans (CBILS), the Bounce Back Loans and Coronavirus Job Retention Scheme and various grants, tax support measures and business rate holidays.  However, these measures can only do so much, and in some instances simply defer liabilities, and will be unable to prevent an at present unquantifiably high number of businesses entering some form of insolvency at some stage in 2020 and leading into 2021. Whilst the statistics tell us there is some light at the end of the tunnel, the general feeling is that the current state of hibernation is not yet fully over.

Whilst the Government support has been welcomed and needed, one option that is expected to see more focus in the coming months is the concept of the pre-pack administration. This entails the sale of the business and any assets being negotiated before the appointment of an administrator and generally completes swiftly after such appointment. The key requirement is that if going down this route, it must be ethical and in the best interests of creditors.

So, what are the advantages? Simply put, they are:

  • Existing Directors who know the business often retain control
  • Employees will see limited interruption and jobs can be retained
  • It provides business continuity i.e. sale as a ‘going concern’
  • Value in assets especially Work in Progress is maintained
  • Suppliers can be looked after
  • Legacy issues such as poorly performing contracts can be addressed
  • Brand reputation is preserved
  • Revenue streams are upheld which a more traditional administration may not be able to honour
  • Costs of administration can be lower
  • The appointed insolvency practitioner will choose the most appropriate buyer for the business

However, pre-pack administration can have a dark side and be considered controversial and even unethical if not managed properly or entered into for the right reasons. For example, if used as a means for Directors to avoid responsibilities and take advantage of creditors (as such, Directors conduct has to be thoroughly investigated); TUPE legislation sees a continuation of employee rights which could be a cost burden to the company, Directors have to find funds to acquire the business assets.  At its worst, it can be used as an underhand means of offering a bargain basement sale that only benefits the eventual buyers and unsecured creditors may lose out as a longer-term marketable sale of the business is avoided.

In summary, a pre-pack administration must be in the best interests of creditors and those within the company, and it is imperative that it can be substantiated if it is to proceed.  It also goes without saying that valuations will inevitably be of heightened focus given the impact of COVID-19 on virtually all areas of the market.

Many previously robust and well performing businesses are now fighting to survive and with a gloomy economic outlook, all parties need to cooperate; the struggling SME itself, creditors, Government, the Banks…..all have a part to play and must be open in approach and view.

Here at Ultimate Finance we have set out an approach for such proposals that ensures all stakeholders are considered – Directors, business employees and/or creditors – and we make sure appointed advisors honour the conduct of transparency for all.  Working with us, we can support the advisors and business owners in considering pre-pack administration with corporate finance restructuring.