The most up to date statistics for England and Wales show that there were 4,001 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the third quarter of 2008 (on a seasonally adjusted basis).  This was an increase of 10.5% on the previous quarter and an increase of 26.3% on the same period a year ago. The Scottish angle mirrors what is occurring in England and further very sobering reading can be found at:

http://www.insolvency.gov.uk/otherinformation/statistics/200811/index.htm

As the UK recession deepens and business insolvency increases, it is imperative that every director (both executive and non executive) should have access to accurate and up to date financial information, thus allowing them to test and satisfy themselves as to their company’s ongoing solvency requirements. Unfortunately all too often this information is not adequate, may be received too late and may not be not acted upon. It is in these difficult trading conditions when directors should be aware of their options, should the viability of the company come in to question. One such option may be to consider a Pre Pack Administration.

A Pre Packaged Administration (or simply Pre Pack as they are more commonly referred to) is a process whereby a sale of the business and assets of a distressed company is agreed with a new company (sometimes referred to as a “Phoenix Company”.) Often this vehicle is set up and managed by the existing directors and/or management team, prior to the appointment of an Administrator. Funding for the phoenix company is secured in advance to enable the sale to be completed immediately after the formal appointment of the Administrator.

Phoenix companies have historically had a bad reputation. This was due to the actions of a minority of directors who, prior to the Insolvency Act of 1986, deliberately ran companies into the ground, only to buy the assets back from a Liquidator or Administrative Receiver, leaving the creditors high and dry. However, the Enterprise Act 2002, which came into effect on 15 September 2003, seeks to promote entrepreneurship and enterprise and it provides support to the directors/owners of failed business ventures. This relatively new "rescue culture" provides the chance for businesses to start over again and enables the profitable elements of the failed business to survive, thereby offering some continuity for both suppliers and employees.

A Pre Packaged Administration is a legitimate and permitted form of saving a business, however certain formal procedures require to be adhered to. These rules are designed to avoid the possible situation of delinquent directors deliberately running a company into insolvent liquidation, leaving unpaid creditors, only to set up a new business trading under a similar name to that of the failed company, and thus misleading the creditors.  The restrictions associated with Pre Pack Administrations apply to anyone who was a director or shadow director of a company in the twelve months prior to it going into insolvent liquidation.

If you are considering acquiring the business and/or assets of a financially troubled company, careful consideration should be given as to how best to achieve this to ensure that the transaction can not be attacked and potentially overturned by any Administrator or Liquidator subsequently appointed over the company.

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