Pre Pack Administration may not be the answer if you owe money to your company
If your company is in financial difficulty pre-pack administration should be considered as a rescue solution. However, the liquidator of the old business has a duty to reclaim any money owed by the company's directors. This may in turn leave the directors at risk of personal insolvency.
Pre-pack administration, commonly known as Phoenixing is often an extremely good method of rescuing a struggling business. Put simply, a new company is set up which provides the vehicle to fund the purchase of the old company's assets. Once the assets are sold and employees transferred, the new business starts to trade in the place of the old.
The administrator will normally recommend that the old company is liquidated using a creditor's voluntary liquidation. During this process, one of the key duties of the liquidator is to collect any outstanding debts owed to the company.
If the directors of the old company have borrowed from the business (such borrowing would be shown as an overdrawn director's account), then the liquidator will have a duty to pursue the directors as normal debtors of the business. Legal action may be taken up against directors to recover the debt if necessary. This action could in turn force such directors into a position of personal insolvency.
What is the alternative to the pre-pack?
Where directors stand to be pursued by a liquidator for debt which they cannot repay, a pre-pack may be discounted as not a viable rescue option. An alternative solution is then to consider a Company Voluntary Arrangement (CVA). A CVA allows a company to propose a settlement of its debts to all of its creditors. The CVA is proposed as an alternative to liquidating the company.
Very often, the CVA proposal is to pay back less than 50% of the company's debts and for the creditors to write off the remainder. This is acceptable to the creditors as the outcome is financially better than if the company was closed.
The key to a company voluntary arrangement is that it does not involve the liquidation of the business. The original company continues to trade very often under the management of the original directors. The officers of the company still have a duty to repay debts that they owe to the business. However, the repayment can be managed overtime and perhaps offset against director's ongoing wages.
Not a magic wand
Of course, a CVA is not an automatic ticket to rescuing a business. A reduced debt burden will be critical to ensure ongoing survival, however there may well be a requirement for substantial operational changes if the fortunes of the business are to be turned around.
I have been involved with several companies where directors have borrowed significant sums from their businesses which they are subsequently not in a position to repay. Where this is the case, they have been unable to use a phoenix solution because of the likelihood that they will be pursued for the debt. In these situations, a company voluntary arrangement has very often worked well for the company and provided a rescue solution which is so badly needed.
Find out more about how these solutions could help your financial troubles:
http://coopermatthews.com/company-voluntary-arrangement.html
http://coopermatthews.com/phoenixing.html
Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services Advice providing practical insolvency advice for businesses with financial problems and to Directors with Personal Financial troubles. They have significant experience in working with small to medium sized businesses.
Prior to Cooper Matthews Derek Cooper was the Managing Director of Wilson Philips specialising in personal insolvency and financial restructuring. He previously worked for 11 years as a financial advisor for Allied Dunbar, and later the J Rothschild Partnership. Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic environment.
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