By its very nature, the process, which involves a pre-arranged sale, (sometimes to connected parties) is perceived with suspicion by stakeholders. Having been involved in a number of successful “pre-pack” business sales myself, I am very clear on the need to ensure that when embarking on such a sale, all other possible routes are considered, best practice is followed in relation to its implementation and all aspects are fully disclosed to creditors as the process will be, quite rightly, scrutinised.

Regrettably, there have been limited cases of abuse of this process by insolvency practitioners and directors alike, which doesn’t help those of us who work hard to do what is ultimately right in difficult circumstances. This has given rise to calls for the process to be changed to root out such behaviour, which may include a minimum period of open marketing prior to any sale being agreed.

Such changes would be impractical and in my view, severely restrict the ability of properly constructed and beneficial pre-pack sales to proceed. Primarily, for the following reasons:

1. There may be insufficient time available to market a business fully, especially where creditor action is imminent;
2. The marketing process may well damage the value and viability of a business once its financial circumstances become apparent to the marketplace.

Thankfully, following a period of consultation, common sense has prevailed and the government has concluded that the current process and supporting regulation should not be changed. Rather, our Regulators should focus on ensuring that insolvency practitioners apply the process appropriately and come down hard on any abuse at the expense of wider stakeholder interests.

WRITTEN MINISTERIAL STATEMENT RELEASED IN JANUARY 2012
EDWARD DAVEY, MINISTER FOR EMPLOYMENT RELATIONS, CONSUMERS AND POSTAL AFFAIRS; DEPARTMENT FOR BUSINESS, INNOVATION AND SKILLS
PRE-PACKAGED SALES IN INSOLVENCY

I have asked BIS officials to now undertake an urgent review in conjunction with stakeholders of how the existing controls on pre-packs have been working and whether, in light of their experiences and the outcomes from the monitoring, more could be done within the existing regulatory framework to improve confidence and transparency. The issues raised by pre-packs are important matters that affect a wide range of stakeholders including business interests, and I look forward to discussing the findings of the review with stakeholders in the spring.

Reins – Winter 2011

Reins – Summer 2011

We are proud to announce that Bailey Ahmad has been shortlisted for Corporate Recovery Firm of the Year (small firms – up to three licensed practitioners) for the second year running in the 2011 Insolvency & Rescue Awards.

The Insolvency & Rescue Awards are the most prestigious awards in the Corporate Recovery and Insolvency industry and give recognition to those firms and individuals who have demonstrated excellence in this sector.

We are extremely pleased that our commitment to continual development, innovation and exceptional service delivery has been recognised by our industry once again.

Bailey Ahmad Corporate & Personal Insolvency: Environmental Policy

Essentially insolvency legislation prohibits any person who has been a director or shadow director of a company at any time for a period of 12 months preceding that company entering liquidation from carrying out the following for a period of 5 years following liquidation:

* Be a director of a company that operates with a similar name or trading style (so close to infer an association with the liquidated company);

* Be involved in any way (whether that be directly or indirectly) in the promotion, formation or management of another company with a similar name or trading style;

* Be involved in any business which trades in a similar trading style as the company which entered liquidation.

Breaching this legislation is a criminal offence and therefore leaves the person(s) involved liable to imprisonment and/or a fine, and possible disqualification from being a director in the future.  Also, should the subsequent company or business fail leaving a shortfall to its creditors, then the person(s) involved may also be made personally liable for the shortfall to creditors.

So the implications of any breach of the legislation are pretty severe and for good reason.  The legislation is there to protect against unscrupulous directors who set-up companies only to rack up debts that they never intended or were ever realistically able to pay, close them down and set up a new “phoenix” operation to do the same again.  Most would agree that those who operate in this way should be stopped from doing so.

Thankfully, the legislation also recognises that sometimes it is beneficial to allow individuals to restart a new business in a similar name or trading style.  For example:

> Where there are genuine reasons for the failure of a company (which thankfully account for the vast majority of cases we see at Bailey Ahmad);

> That quite often, notwithstanding the reputational damage that liquidation may cause, there remains a value associated with the company’s name/brand that an appointed liquidator can sell for the benefit of the company’s creditors.  Furthermore, often those willing to pay the most for the name and brand have had some prior involvement with the insolvent company;

> Where creditors are fully informed and approve a sale of the rights to use the insolvent company’s name and trading style;

> The success of a newly formed company or business, which will provide job opportunities for those staff at risk of unemployment following the failure of the previous company as well as other wider social and economic benefits, may be contingent on its ability to use a similar name or trading style as well the active involvement of those who were directors of the company in liquidation.

So, in the right circumstances the legislation allows for the re-use of a company name and trading style which can be summarised as follows:

* Acquisition of the rights to use the name and trading style from a liquidator of the insolvent company, together with its other assets (subject to creditor notification and approval)

   And..

* Either the appropriate notification of the intended use of a similar name and trading style following liquidation to creditors (prior to its use) or an early application to Court to seek approval to use the prohibited name.

So whilst there is a general prohibition on the re-use of a company name or trading style by former directors of a company which enters into liquidation, with the correct professional advice and guidance it is possible to re-use a company name following liquidation.

If you would like to like to know more this topic, please do not hesitate to contact us on 020 8662 6070 for a free consultation.

DISCLAIMER: This blog is provided as a general guide and only provides a summary of the legislation.  It does not take into account your particular circumstances and therefore should not be relied upon.  Should you feel that you need specific advice in this area please contact us for a free initial consultation.

Please feel free to view a copy of our introductory spring edition by clicking the link below.

Reins by Bailey Ahmad – Spring 2011

Future editions will feature more news and information on topical insolvency issues.

If you would like to receive an electronic version of future editions, please email your details to info@baileyahmad.co.uk and write ‘subscribe me to Reins’ in the subject line.

So why is this? Well, firstly I should explain what a ‘pre-pack’ administration is.  Essentially the process involves a pre-arranged sale of an insolvent (unable to pay debts as they fall due) company’s business and assets, but the sale is only completed following the appointment of an insolvency practitioner as administrator of the insolvent company.  Any sale will have been subject to an independent valuation to ensure that fair value is achieved and review by the appointed administrator. 

The process applies to companies where there is no reasonable prospect of turning the company’s business around or the directors being able to raise sufficient funds, either from a sale of assets or from another source, to return the company to a solvent position in the long term.

From the purchaser’s perspective, they are provided with greater protection as they will be buying from an appointed administrator rather than a director of an insolvent company.  Accordingly, the sale will be less likely to be challenged should the vendor company subsequently enter liquidation.

Typically the process involves a transfer of the business and assets of the insolvent company to another financially secure entity, whether that is a company, individual or partnership.  The purchasing entity may be an unconnected third party or related to the insolvent company in some way (e.g. a management buyout). 

The sale is subject to full disclosure to creditors following completion and the net proceeds are then distributed amongst creditors in an order of priority as laid down by insolvency legislation.  Generally, banks/creditors with security and employees who have preferential claims benefit first, with unsecured creditors following thereafter. 

So why are pre-packs used? Well, some of the key reasons are as follows:

* A sale of the company’s business and assets (usually as a going concern – i.e. avoiding a break in trade) could raise significantly more money for the benefit of creditors than liquidation, which would often result in a cessation of trading and a break-up sale of assets

* An interested party or parties can be identified

* In the majority of cases, as a pre-pack sale tends to be on a going concern basis, jobs are saved, customer and supplier relationships are preserved and generally it allows the survival of a business that would have otherwise been stifled by its association with a debt laden company

* The purchaser will often find it far easier to raise investment to ensure the long term growth and survival of the business that has been acquired

As a firm we have successfully implemented a number of pre-packaged administration sales and all have enjoyed the benefits described above.  If you would like to know more about pre-pack administration, please do not hesitate to call 020 8662 6070.

It is a process that can last up to 5 years, is subject to agreement by over 75% of creditors who vote at a meeting convened to consider the CVA, and is supervised by an insolvency practitioner to ensure that any terms stipulated by the CVA are complied with.

So what are the advantages?  Well, these include (but are not limited to) the following:

1. A CVA typically avoids any break in trade so maintains goodwill and customer relationships

2. Directors remain in day to day control of operations

3. There is no specific requirement for assets to be bought back by a successor company as is often the case with administration and liquidation sales.  This can be particularly helpful where prospective purchasers have limited funding available

4. Personal guarantees offered by directors may be deferred or reduced in certain circumstances

5. There can be tax advantages associated with a CVA in that historic losses will continue to be available to set against future profits and balances due to directors in respect of loans or current accounts will be preserved

6. A CVA carries less stigma than other insolvency processes such as liquidation or administration

7. A CVA is an extremely flexible process that promotes the survival of a company with its business largely intact, albeit often subject to some restructuring.  Therefore it maximises the prospect that all stakeholders benefiting from ongoing trading assuming a return to profitability is achieved

If you would like to like to know more about CVAs and whether it can help your company, please do not hesitate to contact us for a free consultation.

To demonstrate our commitment, we have launched a client charter which clarifies in jargon-free, simple language what our clients can expect of us, and in turn what we require from them, to dramatically improve our chances of a successful relationship.

A copy of our client charter is circulated to all our prospective clients and is available on request.