Business Restructure Through an Insolvency Process

When a long established Direct Mailing House suffered from a downturn in trade, the Directors required advice as to the options that were open to them going forwards, both from a personal point of view to ensure they complied with their legal responsibilities as Directors, and the options available to continue with the business going forwards.

In this case, the benefits of planning ahead with a commercial approach proved fundamental when the business developed financial problems. The Company had been dependent on a loan provided by its Parent Company to provide sufficient working capital when the bank facility could not be increased previously. When the loan was made by the Parent Company, it was formally documented and a debenture was created and registered at Companies House, meaning that if the Company experienced financial difficulty it had a number of options available to it and would be paid in preference to unsecured creditors. This shows the benefit of always structuring things in a commercial way to deal with any eventuality.

When the downturn in trade continued for more than a short time, a business viability review was undertaken which involved preparing cashflow forecasts to show when the company would run out of working capital based on the projected trading. When the review was completed, the option was for the Parent Company to provide additional funding which would be very risky based on the projected trading position, or for the Directors to consider other options. The Directors took insolvency advice and had all the options explained to them as to what they could do.

After carefully considering all options, the Directors accepted that there was no alternative but to place the company into Administration. Taking account of the circumstances in this case, and the fact that the Parent Company was the major creditor with security, it was agreed that the best option for creditors would be to try and sell the trade and assets of the Company in a Pre-Pack Administration. The Insolvency Practitioner has to go through a rigorous process in such a situation to ensure that best value is obtained for creditors. The process involves obtaining a valuation of all assets, consideration of any third party offers, and what is best overall taking account of all factors.

In this case the Directors wished to submit a bid to acquire the trade and assets of the business in order to be able to continue with the business. This involved using a new company (“Newco”) to do this, preparing a business plan incorporating financial forecasts, and raising finance. This involved a lot of work in a very short space of time, to ensure that the Newco would be able to make an offer and be able to operate within the required timeframe.

The offer from management was successful and following the appointment of the Administrator, the Directors were able to immediately complete the acquisition of the trade and assets with the legal agreement having been negotiated prior to the Administration. The company continued trading in a seamless manner and customers were not even aware that the company had entered Administration. In the majority of cases, as management know their business, they are usually in a position to make the best overall offer to the Administrator in such a situation. It is not always the highest offer that will be accepted, other factors are taken into account, for example are jobs being saved.

Following completion of the acquisition of the trade and assets, management had to reach agreement with suppliers regarding continued support, and deal with the transfer of staff to the Newco which usually automatically happens under “TUPE”. This means that all staff are transferred with the same terms and conditions as previously.

Post completion there were numerous matters to deal with, all of the equipment used by the company was leased and lenders had to be spoken to and new agreements negotiated. In such a situation, the equipment providers are usually happy to support the Newco, as the other option is to repossess their equipment and sell it in a forced sale situation, which in the current economic climate is the route of last resort. There were other matters that had to be dealt with by advising suppliers such as the Utility suppliers, the Council in relation to business rates, and other sundry suppliers.

Finance for the Newco was provided by way of an invoice discounting facility that had been negotiated on the basis of the profile of the previous business.

The business is now trading profitably due to the actions taken which has allowed the business to be restructured and not be dragged down by its historic losses. To quote the Directors after the above case had been successfully concluded “Why didn’t we do it sooner?”