Derek Cooper

Phoenixing by using Asset Refinancing

Phoenixing by using Asset Refinancing

One of the things holding them back which company directors face when considering the phoenixing solution is their ability to fund the purchase of the old company's assets and good will. One way this can be financed in the current climate is through Asset Refinancing.

In todays economic climate an increasing number of businesses are struggling. The insolvency service statistics published on the 1st May 2009 showed the number of companies going into liquidation in the first quarter of this year was over 50% higher than during the same quarter the previous year.

One of the potential ways of rescuing a failing business is Pre-Pack Liquidation (commonly known as Phoenixing). This solution has been much discussed during 2009 and is where a new company is set up and an agreement made to buy the assets and goodwill of the older failing business before it is liquidated. Once the transaction is completed, the old company is then wound up and the new business can trade on.

Pre-pack liquidation can be an extremely good way of rescuing a business which is failing due to the burden of legacy debt or unwanted / unfavourable lease agreements. It can ensure continuity of supply to customers and safeguard jobs which are transferred to the new company under the same working conditions (following the rules of TUPE - Transfer of undertaking and permanent employment).

One of the things holding them back which company directors have to consider when considering a pre-packing solution is their ability to fund the purchase of the old company's assets and good will. If a pre-pack is to be considered, the old company's assets must first be properly valued. If the business owns a significant amount of plant and equipment, this could amount to a considerable sum which the directors / owners of the new business must find in order to buy the pre-packaged assets. With the challenges obtaining bank loans at the moment this can prove extremely difficult to finance.

Because of this, more and more pre-pack liquidations are being funded through Asset Refinancing. Using this process, money is lent to the directors of a new company on the basis of the asset value of equipment which is owned by the old business. A sale and purchase agreement for the old business assets is drawn up. The money required for the purchase is then lent to the new business on the basis of it being secured against the assets which will be transferred. Generally, as well as the security provided by the assets themselves, the directors of the new business will also have to personally guarantee the repayment of the finance. However, this situation is to be expected and is no different to the requirements of standard lending.

I have recently been involved with a number of pre-pack liquidation solutions where asset refinancing has provided a very good way to raise the finance necessary for the purchase of the old business' assets. Often these cases have been where the old business has assets of significant value which must be reasonably paid for but at the same time can stand as good security for a loan taken by the new business. I strongly believe that a properly managed pre-pack liquidation is an excellent way to rescue a business. Given asset refinancing can overcome one of the barriers to enabling pre-packs, the use of this tool can only help in this area.

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