In our insolvency and restructuring blog series, we’ve been exploring the various options available to businesses that may find themselves in financial distress, but fundamentally have a sound business that has the potential to succeed.

We’ve covered topics, such as Company Voluntary Arrangements (CVAs), pre-pack administrations, as well as what to consider in the early stages of restructuring.

When it comes to proactive ways to deal with a business that needs a helping hand, these are the most popular and, to a large degree, the most effective methods to keep a business above water. However, there are some less common tools that, in the right circumstances, could help companies to move forward. So, what are they?

Liquidation
Traditionally, liquidation is a terminal process. It’s generally intended to bring the life of a company to an end in an orderly fashion.

However, there are scenarios where liquidation can be used in a more proactive way. In certain circumstances, typically smaller businesses can use liquidation in a similar way to a pre-pack administration, where the assets of the business are essentially reacquired from the liquidator.

It’s also important to note that there are two basic forms of liquidation – insolvent and solvent. On the one hand, if you cannot afford to keep the business afloat and know it’s the end of the line, then it’s worth considering insolvent liquidation as a means to formally close down the business. On the other, if the company has been successful, but you’re in a situation where you want to wind it down (e.g. as part of a wider group restructure, or perhaps after an SPV has served its purpose), then a solvent liquidation may be the best route for you. In that scenario, the assets of the business are realised and distributed to the shareholders.

Moratorium process

The standalone moratorium was introduced via the Corporate Insolvency and Governance Act 2020. It can be used independently (in that it is not automatically followed by an insolvency process – moratoriums in English law have traditionally been attached to administration or a CVA, for example) and is designed, according to the Government, to create ‘formal breathing space in which to explore rescue and restructuring options, free from creditor action’.

Except in certain, limited circumstances, no insolvency proceedings can be instigated against the company during the moratorium period, which is 20 days. It also prevents most forms of legal action being taken against a company without permission from the court.

Insolvency statistics indicate that the moratorium has not been widely used. That might be down to a lack of understanding of the process – new law always takes time to settle of course – but, it’s important to note that, while 20 days may appear a short amount of time in order to resolve serious financial issues, the intention is really that a business uses that time to consider and finalise wider restructuring plans. In reality, the expectation would generally be that the moratorium would be followed by some other form of insolvency process. In that sense, there is no reason why the moratorium cannot be a useful tool in the right circumstances.

What are the options?

When a business finds itself in difficulty, the good news is that there are a number of options they can explore with the support of a professional adviser. Those options have been covered at greater length in this series and the links to our previous blogs are below:

General Restructuring;

CVAs; and

Pre-pack Administration.

It’s true to say, of course, that what works for one business may not necessarily work for another. Similarly, what is effective in one sector might not have the same impact in another. The key to insolvency and restructuring is to understand the current state of your own business and to be open minded about the various options available to you. No-one ever wants to seek insolvency advice, but sometimes it is impossible to avoid. Professional support is likely to be hugely valuable if you do find yourself in that position.

If you would like to discuss this blog, or any of the blogs in our insolvency and restructuring series, contact me on  (0)7920 237687 or email daniel.clarke@pannonecorporate.com

In the last three years, companies of all shapes and sizes have had to contend with a plethora of challenges that have severely tested the balance sheet and put a strain on even the best run businesses. Brexit, a global pandemic, geo-political tensions, a cost-of-living crisis, record inflation, rising interest rates, and crippling energy prices, have all been layered on top of each other to create a bruising trading environment for many.

The simple fact is, demand in certain sectors has fallen and is slowly recovering, the cost of business has shot up, and the job of getting things done has become more time consuming and onerous. It’s little wonder that a significant proportion of SMEs have accumulated considerable liabilities during this period and have reached the point where a different course of action is needed, in order to secure the long-term future of their business.

Step in, pre-pack administrations. Loved by some, loathed by others (namely creditors), pre-pack administrations haven’t always had the best reputation, because the sale of the business and assets is often completed before the creditors of the insolvent company are even aware of the administration.

Post-COVID, many predicted a resurgence in ‘pre-packs’, which has yet to materialise, but with much of the Government support brought on by the pandemic now at an end, the restructuring tool remains a viable and useful mechanism for securing the future of those businesses that are fundamentally sound, but have been weighed down by debt and outstanding liabilities.

So what are ‘pre-packs’ and how can they help businesses looking to restructure? 

What is a pre-pack?

The term ‘pre-pack’ is used to describe the process whereby the business and assets of a company are sold, via administration, in an arrangement that is typically negotiated in advance of the company concerned formally entering into an insolvency process. The buying party is often (but not always) connected to the company (e.g. a new company formed by the existing directors of the company in administration).

Essentially, the process allows a valid business to survive whilst relieving it of creditor pressure but also ensuring that its assets are realised for proper value. It’s the latter aspect of that equation that has been an area of concern for some and which reforms brought in two years ago were focused upon – tightening up regulatory intervention and introducing more accountability.

When is a pre-pack appropriate?

‘Pre-packs’ can be a really effective tool for all concerned when they’re used in the right way. Typically, they’re used where a company has a good underlying business but is struggling to meet its ongoing liabilities – it’s not uncommon for there to be an imminent threat of, for example, a winding up petition, or a cessation of supplies/services which would damage the business.

Administered properly, pre-pack administrations create a virtually seamless transfer of business and assets from the insolvent company to the purchaser. This can have significant benefits for the majority of stakeholders involved, because it allows for a high level of continuity. The business can continue trading under the same name (subject to compliance with section 216 of the Insolvency Act and its associated provisions), often from the same premises, and with the same staff. This means that the underlying business retains value, which is ultimately good news for all involved (especially when compared to the potential outcome, for example, in a liquidation). For those reasons, where they are viable, ‘pre-packs’ have always appealed to struggling businesses.

During the COVID-19 pandemic, the Government put in place a significant number of measures to support businesses, including those in the Corporate Insolvency and Governance Act, aimed at protecting businesses during the pandemic, providing much-needed respite for struggling companies. Those protections and safeguarding measures have now largely gone, leaving many businesses still exposed to the economic headwinds, which is where pre-pack administrations can play a part.

Key considerations

There are a number of important questions to ask and considerations to be made when exploring the option of pre-pack administrations.

• While ‘pre-packs’ allow you to ‘drop’ your debt at the point at which the company enters administration, allowing the business to continue trading without those liabilities, it does not remove the pressures that continue to face businesses, such as rising interest rates and energy bills. While you may be able to remove the historical arrears that have been saddling the business, you still have to ensure that you have sufficient means to meet any liabilities in the future, such as the general costs of running a business. As such, carefully consider what these may be moving forward.
• Focus on customer contracts. Following a ‘pre-pack’, these could be terminable and in any event, will need to be assigned or novated to the new company, so it’s important to consider customer relationships and whether they would support the new business following administration.
• The same can be said for suppliers. Think carefully about key supplier relationships and the likely impact of a ‘pre-pack’ on them, in terms of outstanding liabilities.
• It’s extremely likely that the ‘new’ business will need to explore lending options moving forward, so it’s important to look at your current banking and lender relationships as well. Quite often, lenders will not support a business post-pre-pack, particularly if they’ve been left exposed. As such, in many cases, businesses will need to secure new banking facilities elsewhere.
• It’s important to consider your employee position, before embarking on a pre-pack administration. Typically, in the event of a ‘pre-pack’, all staff will TUPE across to the new business, but ensure you seek professional advice about dealing with employment issues as part of the process.
• As a business, if you rely on equipment that you’ve rented as part of a hire purchase agreement for example, it’s essential to note that those terms and conditions will be with the old company that’s going into administration, so thought needs to be given to future arrangements.
• Property must also be taken in account – are you in leased premises? Again, those terms will be held with the old company and will potentially need to be renegotiated.
• The vital thing to remember throughout the process is that nothing is free. In order to buy the business out of administration you will need to pay the administrators for the assets that are being transferred. In an insolvency scenario, it may well be the case that the price of the business will be lower than if you were buying it solvently on the open market, but it still needs to be funded. In addition, it’s important to note that administrators are not obliged to sell to the previous owners. In the event that a competitor gets involved in the bidding process, the price may be driven up.

Pre-pack administrations have a valid part to play in securing the long-term future of businesses, but there is a lot to consider before going down the route of a ‘pre-pack’. Now is the time to go through your options, taking into account the future economic outlook. With interest rates and energy bills still creating significant ongoing liabilities for companies, which will not necessarily be taken away by a pre-pack administration, it may pay to wait for the waters to calm before embarking on your ‘pre-pack’ journey.

If you’d like to discuss the blog in more detail, contact me on  (0) 7920 237687 or email daniel.clarke@pannonecorporate.com

Financial trouble can hit any business and, in a post-pandemic world, it’s even clearer how fragile things can be. However, if issues arise, it may be necessary to seek alternative means of securing your future.

If you hit stormy seas, what options are available to help your business?

One of the most effective and common methods of securing an organisation’s position in the market – and to which financial hardship is not necessarily a pre-requisite – is a business restructure.

Restructuring is a catch all term that involves changing the financial, operational, legal, or other structures of a business to improve efficiency, profitability and cash flow. There are no hard and fast rules as to what a restructure will look like but it tends to involve refinancing, streamlining and/or corporate simplification, sometimes combined with a formal insolvency process, sometimes not, typically with the overarching aim of dealing with debt. However, companies may also restructure if they’re preparing for a sale, buyout, merger, or transfer of ownership.

There are significant benefits to undertaking a restructuring exercise and business owners should try not to be anxious about the process – it’s an opportunity to reflect on its current position and take the necessary steps to shape the future you want.

However, it’s important to bear in mind that restructuring is by no means a one size fits all process –what may work for one company, could be totally unsuitable for another. In order to be effective, the process requires the expertise and support of specialists who can work closely with the management team and other key stakeholders to devise and deliver an appropriate plan.

Here at Pannone Corporate, we’re experts in providing pragmatic advice to businesses of all sizes across a wide range of business sectors. Our Corporate Recovery team can help identify and implement the best solution in so far as restructuring is concerned – all done in a way that is tailored to your current needs, with a focus on you future strategic objectives.

Over the coming weeks, we’ll be developing a series of blogs to give business owners all the information they needs about the options available to them when it comes to restructuring. You’ll hear from a range of specialists as we cover:

• General restructuring
• Administration (including pre-pack sales)
• Company Voluntary Arrangement (CVAs)
• Other formal insolvency options.

If you need restructuring advice now, don’t hesitate to contact one of our experts. We’d be happy to help. Contact restructuring and insolvency partner, Daniel Clarke on  (0) 7920 237687 or email daniel.clarke@pannonecorporate-com.stackstaging.com

The reputation of so called ‘pre-pack’ administrations has not always been positive but, in the right circumstances, they’re an effective way of ensuring the future of an otherwise insolvent business. The mechanism allows a potentially valid company to survive, but relieves it of otherwise debilitating debt.

In the midst of a global pandemic, when otherwise viable businesses are finding themselves in unfamiliar financial territory (in many cases, for no reason other than the impact of the pandemic), the option of restructuring in this way is, unsurprisingly, likely to be attractive. For creditors though, the prospect may not be as appealing.

In recent years, the number of pre-packs has generally been falling – be it because of a negative reputation, a changing regulatory and legal landscape, or the appeal of alternative routes. But, as Government restrictions relating to Covid begin to be lifted – whether that be the furlough scheme, or the kind designed to provide businesses with breathing space to continue operating throughout the pandemic – the prospect of a rise in pre-pack administrations is definitely on the horizon.

It’s perhaps no coincidence that the process has come under Government scrutiny at a time when a pre-pack may be regarded as a ‘quick and easy’ solution for struggling companies. Reforms, which will come into force at the end of April, following lengthy consultation by the Government, are designed to rehabilitate the process. The changes (which introduce an independent evaluator) are likely to make pre-packs less straightforward and potentially more expensive to complete.

The reforms are broadly well intentioned – designed to increase trust in the process and reduce the perceived abuse of the mechanism in the past – they may well prove to be an effective way of shaking off the generally negative perception of pre-packs in some quarters. In the right circumstances, and conducted appropriately, pre-packs have always served as a useful tool. It is to be hoped that these reforms will complement the process rather than hinder it.

Whilst it appears unlikely that the floodgates are about to open, with businesses rushing to complete pre-packs before the changes come into effect, there is a window of opportunity for those considering restructuring and it may be prudent to review potential options in that respect prior to the changes coming into effect.

That said, pre-pack administrations will, of course, continue to be a viable option post 30 April. No doubt the industry will adapt to the reforms and we will continue to see the use of the process in appropriate circumstances.