A Solution to Watching Decent Business Fail; the Credit Crunch Has Forced Hundreds of Companies into Liquidation, Leaving Thousands Unemployed. but Is There a Viable Alternative to Businesses Going Bust? Harrison Clark Insolvency Expert Jonathan Whitbread Discusses the Controversial Prepack and Why Management Buying Back a Business out of Administration Can Be the Best Solution
Byline: Jonathan Whitbread
B usinesses are facing possibly the toughest trading conditions in living memory so it's no wonder that some businesses are going into liquidation, leaving a trail of creditors and staff facing the dole queue when the business effectively ceases to exist.
Against the backdrop of the current economic conditions what insolvency option offers the best outcome for creditors, employees and the wider economy? The first point is that there is no "one size fits all" panacea.
Historically trading a business from within an administration was often a viable option. However, in the current economic climate it is much harder and riskier for an administrator to trade a loss making business for long. Advantages of such trading were that it gave a window for the business to be properly marketed, allowed negotiations and limited due diligence to be undertaken by interested parties and ultimately for a sale to be completed hopefully on preferable terms.
In the current market where many otherwise acquisitive companies are "battening down the hatches", many of those still willing to "take a punt" on distressed businesses are only willing to do so on very heavily discounted terms.
With such uncertainty in the economy who can blame them. This suppressed "best deal value" is tacitly acknowledged by the banks who maybe unwilling to continue to fund administration trading when they already have a significant shortfall from the pre-insolvency trading period and there is not the likelihood of a top realisation value at the end of the process Add to this that it is also harder to finalise deals where third party purchasers are finding it harder to raise finance and, unlike former management, they are more likely to be scared off at a late stage in negotiations whether because of uncertainties as to employee liabilities, third party asset claims or whether customers will actually stick with the business.
Just see the current LDV difficulties for an example of this.
It is against this backdrop that prepackaged sales, or pre-packs, have come to the fore.
Put simply, a pre-pack, which is perfectly legitimate under insolvency law in the UK, is where a deal is agreed to sell the business and assets of a company prior to insolvency which is then completed very soon after the start of an administration.
They have hit the headlines because it's often the business owners or management team who snap up the business, without the burden of the company's outstanding debt, leaving creditors and shareholders with little or no hope of recovering their positions. …