The Enterprise Act 2002 and the needs of Insolvent Companies
Although bankruptcy is a term often applied to companies, technically only private individuals (and partnerships) can become bankrupt. Businesses become insolvent, and there are two ways out of insolvency for a corporate entity: liquidation, and administration.
Owing to the provisions of the Enterprise Act 2002, since that date companies undergoing financial difficulties severe enough to move into bankruptcy proceedings have been electing to move into administration rather than into liquidation. The insolvency provisions in the Enterprise Act were designed to ensure that as far as possible companies which were practical to rescue could be rescued, rather than dissolved and stripped for their assets. Swift insolvency proceeding and a rapid return to operation with a suitable recovery plan in place offers the best chance for the retention of jobs, protection of supply chains and linked businesses, and minimises costs to the Exchequer, not to mention the preservation of employment figures.
The damage done to a business by a prolonged period in administration can in and of itself cripple the prospects of the company of ever returning to solvency. Both suppliers and customers are likely to begin a process of locating other partner companies, and the financing required to trade during administration is a diminishing and costly resource that further burdens a company with preferential debt.
Accordingly, it is frequently in the best interests of the insolvent company to exit the period of administration as swiftly as possible, and the common approach for this is known as the ‘pre pack administration’, a process which results in a period of administration of often less than a day and ensures the continuity of the business which is protected from its outstanding creditors by the Court during the momentary period which dissolves debts and contracts.
Concepts of Pre Pack Administration
Normally, a business continues to trade where possible (when funding can be secured and regulatory conditions permit) during the administration period, while the administrator seeks to market the business to a third party. While this process is considered more transparent for creditors, it can prolong the damaging conditions of administration or even prevent the sale of the business as a going concern.
Minimising the period of administration is possible through the pre-arrangement of a fully developed recovery plan before an administrator is appointed. The sale of all or part of the company’s assets is negotiated with a third party company during the run up to entry into administration, and as soon as the administrator is appointed, he immediately effects the sale that has been arranged. UK courts have held that this is permissible even without court approval, without the approval of the creditors, and even against the wishes of the majority creditor.
Obviously, in order to minimise the damage of being seen to be in administration, even in the case of a pre pack administration it is necessary to ensure that the recovery plan and sale is kept secret so that the business transitions from going concern to going concern. The absence of open marketing can lead to challenges that the maximum return on the sale of the business was not realised. However, UK courts have further held that this is a necessary evil to facilitate the continuity of the business, even if such deals favour secured creditors and management over the interests of the unsecured creditors.
Mark Jefferson is a seasoned commercial finance professional with over 25 years’ experience in financial services, much of that spent providing funding to SMEs. Mark has worked with many other firms in a similar situation to yours. Call Mark on 0800 157 7355 and you can also follow him on Google+
Every month Business Recovery help businesses improve their cash flow. Request a quote to find out how much extra cash you could raise.