Administration or Pre pack Administration – rules and procedures
KSA Group will only advise companies to use this powerful tool where all other rescue or turnaround options have been considered and discounted as there are lots of rules, regulations and costs that need to be considered. After meeting your clients, free of charge, we will report that the other options are not suitable and then point out the benefits and downsides of administration as below.
Incidentally, please remember that KSA Group ALWAYS set out all options in writing, there is no charge for this professional report. If your clients are struggling and are facing aggressive legal action, such as a winding up petition, then administration could be an option to consider.
The Administration Option:
1. The main downsides with this approach are the cost and loss of control it can result in. The directors do not remain in control, the administrator runs the company.
1.1. In addition all correspondence, emails, websites and even the answering of telephone calls must have a statement made that the company is “in administration”. This can be very damaging to the marketing of the business.
2. What would be the purpose of the administration? As we describe on our website http://www.companyrescue.co.uk/company-rescue/guides/detailed-administration there are now three purposes:
2.1. Company rescue (as a going concern) must be considered as the primary objective. This is normally a CVA.
2.2. If that is not possible, then the administrator can achieve a better result for the creditors than would be obtained through an immediate winding-up of the company, possibly by trading on for a while and selling the business as a going concern.
2.3. If neither of the first two objectives is possible, the administrator can realise any property to make a distribution to secured creditors.
3. The Administrator must state the purpose in his report to the court. We believe that administration is often chosen to “achieve a better result” when CVA could have been used!
4. Directors can be removed within a short period to mitigate overhead costs. Thus, the Administrator controls the business activity, not the directors.
5. The insolvency practitioner will require the directors (and officers of the company) to provide full disclosure as to their actions by completing a questionnaire. The administrator then uses this completed questionnaire when completing this “D” Form in respect of all directors and forwarding this to the DeBIS with his/her views as to whether the directors have acted correctly or otherwise.
6. Secured creditors position. The bank is often the appointer of the administrator. The aim should, be to get a better result for the secured lender. Occasionally the secured debt is novated to the “newco”.
6.1. Most bank’s have a panel of insolvency advisors from the large UK insolvency firms. If there is significant bank debt the bank will prefer to appoint one of this panel.
7. It is likely that preferential creditors (employees for arrears of pay and holiday pay up to certain statutory limits) will receive a full dividend in most administrations. In the case of a pre-pack administration it is usual that any remaining employees are transferred to the acquirer, so there may well be few or no preferential claims.
8. Unsecured creditors may receive a very small dividend under the “prescribed part” or no dividend at all. This is often why the “noise” about administrations is led by disgruntled unsecured creditors.
8.1. Unfortunately the order of priority to repay creditors in insolvent administration is (generally) bank fixed charge/administrator’s fees/ preferential creditors/secured creditors (floating charge)/unsecured creditors.
8.2. Thus unsecured debt legally ranks behind most other creditors except for the modest recovery under the “prescribed part”.
8.3. Thus there is usually little hope of any dividend for unsecured creditors.
9. It is possible to undergo a Pre-Pack Administration;
9.1. Typically a “Newco” is formed to acquire the business from the proposed Administrator.
9.2. An independent insolvency practitioner (IP) is appointed to act as advisor prior to becoming the Administrator. He or she will ensure that a contract to sell the business is drawn up and valuations obtained of the business and its assets.
9.3. He or she will open discussions with an acquirer such as “Newco”. Typically this Newco can be formed by the directors, trade competitors or new investors.
9.4. This approach relies on the Newco/acquirer purchasing the assets of the business, to try and ensure continuity – but the “company” itself is usually liquidated afterwards.
9.5. The value of the business should always be determined by an independent valuer such as a chartered surveyor in our view.
9.6. The proposed administrator will market the business for sale. A third party may enter the bidding process. The administrator will expect the directors to inform him of any party they know of, or have had discussions with, who may be interested in buying the business. These parties will then be contacted by the administrator
9.7. The process must obtain a BETTER RESULT than winding up for the creditors.
9.8. If the company was to be pre-packed then the “Newco” would need to ensure that premises, contractual obligations, customer contracts and asset finance are transferable.
10. TUPE issues apply in Administration; under the Transfer of Undertakings (Protection of Employment) Regulations 2006 the new company has to adopt the employment rights of employees and may not remove employees. The National Insurance Fund will not meet the claims of redundant employees. New case law in 2011 allows employees made redundant by “oldco” before the Administration to bring unfair dismissal claims against “newco” Read our recent article on how TUPE has changed
Under SIP 16 insolvency practitioners must observe strict rules to be open in the transaction process under pre-pack. KSA Group believes that we will see a decrease in the number of pre-pack and an increase in CVAs as a result of this tighter legal framework.
If you have any questions on this option or would like a free copy of our Turnaround and Insolvency Professional Toolkit please call Robert Moore on 020 7 887 2667 or call Keith Steven on 07974 086779.