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Written by Keith Tully
Sometimes selling an insolvent company to a member or director can ensure the continuity of trading. This is known as setting up a phoenix company and Real Business Rescue can help with a process called Pre Pack Administration. Here are some things you may wish to consider...
When a company in the UK is facing serious financial difficulties one of the best options they may wish to consider is pre pack administration. This is a completely legal and powerful way in which to sell a company to a third-party whilst it is still trading, especially when being faced with threats from creditors amongst which can be HMRC. Of course, the main benefit is that the business can continue trading during the transition to a new company without incurring any penalties if the process is followed to the letter of the law. Once it is decided that a company will be sold, it is time to contact an Insolvency Practitioner.
Pre Pack Administration Loosely Defined
The first thing to understand about pre pack administration is that an administrator will need to oversee the entire process. This is clearly defined by law and the administrator is generally an Insolvency Practitioner or turnaround specialist. The basic idea behind pre-pack administration is that an insolvent company faced with serious financial problems will be sold to a new owner, or owners, in a relatively short period of time. These new owners may be a totally disinterested third party or even members of the current Board of Directors. Should this be the case, it is imperative that a licensed IP offers support by making it perfectly clear how to go about the transaction so as not to be accused of being duplicitous or of wrongful trading.
Understanding What Is Being Sold
When undergoing pre pack administration, one of the greatest misunderstandings is in exactly what is being sold. It should be understood from the onset that the business and assets are up for sale but not the existing company itself. Real Business Rescue Help & Advice Service will help to clarify the issue for both the current and new owners. When the prepack administration is complete, the company will still be trading probably with most of its current clients, suppliers and perhaps many of the same employees, but it will be a totally new company with a new name and new owners. When the purchase contract is drawn up the old company is protected by law (the Court) and burdensome contracts and debts are eliminated. In other words, the business and assets are being sold minus debts and existing contracts.
Beware of TUPE
Unfortunately, some employees may need to be let go when the company is sold and this is not always an easy thing to do. Not only is it difficult to choose which employees should be made redundant, but there are also laws which need to be adhered to. The law being referenced here is Transfer of Undertakings (Protection of Employment) Regulations, usually referred to by its acronym TUPE. Real Business Rescue can help with advice and support during this stressful time.
The main purpose behind these regulations is for the protection of employees working for a business that changes ownership. TUPE regulates how employees are moved over to a new employer along with any liabilities which may be associated with those positions. Although these specific regulations do, in fact, deal with other aspects such as outsourcing and taking over licenses and leases, the main area which can result in major penalties is in the context of how employees are dealt with during a change of ownership.
Preserving Value during Transition
One of the main advantages, if not the main advantage, during transition to new ownership is to ensure that business is carried on as usual. Bear in mind that any disruption of business can decrease the value of a company, which in turn would have a great impact on the final sale price. Sometimes a business is sold to interested parties, sometimes referred to as connected parties, such as former directors which tend to help make the transition smoother. Anyone having worked for the business knows the ins and outs and is likely to be able to have hands-on even before the sale is finalised. New owners will often be at a disadvantage because they will be, for all intents and purposes, learning from the ground up.
Mitigating Negative Publicity
Many new owners are aware of the fact that buying an insolvent business can have a negative impact with clients, suppliers and even amongst employees. Since the administrator will be dealing with accounts, he or she can quickly help to show how the business will turn around and under new leadership will be a benefit to all involved. This is why reforming a new corporation being purchased by current members or directors can be a great advantage. Actually, most suppliers and clients are happy to do business with a company who knows their needs and is geared toward success. Besides, the company was already insolvent and creditors would wait an extended period of time in most cases to recoup even a small percentage of what is owed to them. Ongoing business means greater revenue in the long term.
Wrongful Trading – Time Is of the Essence
Speaking of negative publicity, there is even something greater to be aware of and that is wrongful trading. If a company is insolvent and continues businesses usual it can be found guilty of wrongful trading and the penalties are severe. It may be far better and much quicker to utilize prepack administration, when at all possible, as opposed to other approaches such as a CVA or to be forced into a winding up petition. The entire procedure and process can take anywhere from 4 to 10 weeks whilst a CVA, for instance, happens over the period of three or five years. It cannot be said often enough that if you suspect your company is insolvent you need to act quickly to get expert advice and direction so that you aren’t in violation of any pre pack administration rules. Wrongful trading is a serious offense in the UK.
Although prepack administration is quite involved from a legal perspective, it actually is not as difficult to accomplish or as time consuming as other insolvency alternatives. The thing to keep in mind is that the business and its assets will be sold to a third-party who may or may not have been directly associated with the company at any time. The business will continue trading under new ownership and probably the directors but the key point is it will continue trading and the current company will avoid being declared bankrupt. This obviously has much less negative impact and the new owners should find that most suppliers and clients are willing, if not eager, to do business with them.
For help and advice on pre pack administration and to gain the advantages of a pre pack administration deal, don’t delay. Call Real Business Rescue so that our expert help and advice service can offer the support you need along the way whilst keeping the entire process smooth and within the confines of the law.
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