Pre-pack administration is often an extremely good method of rescuing a struggling business, however where the director has borrowed money from the company, an alternative solution is to consider a Company Voluntary Arrangement (CVA).
Where your business is in financial difficulty pre-pack administration should be considered as a rescue solution. However, the liquidator of the old business has a duty to reclaim any money owed by the company's directors. This may have a knock on effect of putting the directors at risk of personal insolvency.
Pre-pack administration, commonly known as Phoenixing is often an extremely good method of rescuing a struggling business. Put simply, a new company is set up which provides the vehicle to fund the purchase of the old company's assets. Once the assets are sold and employees transferred, the new business starts to trade in the place of the old.
The administrator will normally recommend that the old company is liquidated using a creditors voluntary liquidation. During this process, one of the key duties of the liquidator is to collect any outstanding debts owed to the company.
If the directors of the old company have borrowed from the business (such borrowing would be shown as an overdrawn director's account), then the liquidator will have a duty to pursue the directors as normal debtors of the business. Legal action may be taken up against directors to recover the debt if necessary. This action could have a knock on effect of pushing the directors towards personal bankruptcy.
What is the alternative to the pre-pack?
Where directors stand to be pursued by a liquidator for debt which they cannot repay, a pre-pack may be discounted as not a viable rescue option. An alternative solution is then to consider a Company Voluntary Arrangement (CVA). A CVA allows a company to propose a settlement of its debts to all of its creditors. The CVA is proposed as an alternative to liquidating the company.
Very often, the CVA proposal is to pay back less than 50% of the company's debts and for the creditors to write off the remainder. This is acceptable to the creditors as the outcome is financially better than if the company was closed.
The good thing about a company voluntary arrangement is that it does not involve the liquidation of the business. The original company continues to trade very often under the management of the original directors. The officers of the company still have a duty to repay debts that they owe to the business. However, the repayment can be managed overtime and perhaps offset against director's ongoing wages.
Not a magic wand
Of course, a CVA is not an automatic ticket for rescuing a business. A reduced debt burden will be critical to ensure ongoing survival, however there may well be a requirement for substantial operational changes if the fortunes of the business are to be turned around.
I have been involved with several companies where directors have borrowed significant sums from their businesses which they are subsequently not in a position to repay. Where this is the case, they have been unable to use a phoenix solution because of the likelihood that they will be pursued for the debt. In these situations, a company voluntary arrangement has very often worked well for the company and provided a successful Business Rescue.
What happens to the directors if a company is wound up?
Once a company is being wound up a Liquidator will be appointed. The liquidator will undertake an investigation into the conduct of the directors to see whether they have knowingly allowed the business to trade while insolvent thus making the creditor's position worse. If this is the case, a director may face being disqualified and held personally liable for the company's debts. As a Director we look at the options you have.
What will having a County Court Judgement do to my company
If a county court judgement remains unpaid, this could lead to more serious action being taken against the business. We look at the impact and what you can do.
Company debt restructure to improve cash flow
Ensuring that enough cash is available to maintain their business must be a priority for companies. Those that do it well will survive. Those that do not are likely to fall. As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority. We discuss some of the solutions available.
