2021: The Year of the Pre-Pack Administration?

Wed 03 Feb 2021

Backdrop

Although the introduction of UK wide lockdowns was not the start to 2021 that the country was hoping for, it remains the year when hopes and expectations are high for a return to normality given the vaccination programme underway.  Unfortunately, it may also be a year that heralds a glut of business failures with corporate insolvencies having been significantly suppressed in 2020 (despite the headline grabbing retail failures).

Whilst a proportion of business failures may be “forced” in 2021 e.g. due to the embargo on statutory demands and winding up petitions being lifted or secured creditors enforcing their security, there will also likely be a significant number of director-initiated insolvencies, including pre-pack Administrations.

Whilst many businesses have been able to survive 2020 due to a combination of Government and lender support, many will also likely be reporting substantially weaker (if not insolvent) balance sheets with liabilities due for example in relation to the Coronavirus Business Interruption Loan Scheme or Bounce Back Loan Scheme, HMRC arrears and potentially material trade and other creditor balances if there has been informal “stretch” to further support cash flow.

Furthermore, there has likely been limited incentive to date for a director to consider restructuring options given the ongoing uncertainty in relation to COVID-19 and the associated restrictions; why go to the trouble of restructuring your business if any new company is going to be faced with the same lockdown / tier system challenges and uncertainties?

However, when life does return to some normality and businesses are presented with the reality of an unserviceable debt burden, particularly in light of the need for cash for working capital and capital expenditure and difficulties in obtaining new investment or funding, many directors / shareholders may conclude that their business is not viable in the short and / or medium term (or by way of a Company Voluntary Arrangement). They will then turn their thoughts to the options available, which will include Administration with the associated potential to “buy back” the business.  This will of course be subject to the marketing of the business to third parties and other regulatory matters but may represent a sensible way forward in the circumstances.

What is a pre-pack Administration and key considerations

A pre-pack Administration is where the sale of business and assets is pre-negotiated so that a sale (which could be to a connected party) can complete immediately following the appointment of the Administrator.  Given that creditors are effectively being presented with a “fait accompli”, pre-pack Administrations are subject to significant regulation including a requirement to conform with prescribed marketing essentials.

In relation to a potential pre-pack Administration, a director should be mindful of the following:

• An effective mechanism for restructuring a business, often saving jobs;

• Avoids a potentially prolonged and damaging period of uncertainty (compared to if the business entered an insolvency procedure without a sale first being agreed);

• Any credible interested party will need to provide proof of funding for their offer;

• If the purchaser is connected, a submission to the pre-pack pool should be considered (note also that a sale of a business / assets to a connected party by an Administrator in the eight weeks following an appointment may be subject to additional regulation later this year);

• Any personal guarantees to creditors or lenders will likely crystallise;

• Early engagement with holders of security is of critical importance; and

• A pre-pack Administration may damage relationships with both customers and suppliers.

Clearly, any decision in relation to a potential insolvency is not to be taken lightly and if you are a director of a company in financial difficulty, the points below remain as important as ever:

• Take advice as early as possible in order to maximise the options available, this can be from your accountant in the first instance who may refer you to a suitably qualified insolvency practitioner and / or lawyer. Note that for any initial meeting, most insolvency practitioners will also likely be more than happy to speak to you free of charge;

• Remain mindful of your personal statutory duties to the company and creditors (directors should take independent legal advice); and

• Avoid taking any actions that would potentially be challengeable in the event of a formal insolvency procedure e.g. deliberate dissipation of assets, preferring one creditor over the general body of creditors or selling assets at an undervalue.

Written by Richard Hough

Associate Director

Richard is a Chartered Accountant and qualified Insolvency Practitioner with over 14 years’ experience and can be contacted on richard.hough@mazars.co.uk, 0161 238 9239.