Technical Briefings

21 July 2010

The Forgotten Purpose - July 2010

Since the introduction of the new out of court administration process and the subsequent birth of what has commonly become known as the “Prepack” that is all that we ever hear about. Today the word administration has become synonymous with the word prepack.

However, what the press and insolvency practitioners alike seem to have forgotten is that the Insolvency Act states that the first purpose of administration is to “rescue the company as a going concern”. The word company in this sentence really should be underlined because we are not talking about the continuation of the business and assets via a new company, we are talking about rescuing the whole thing, warts and all, so that the company can emerge from administration a fully functioning contributor to society.

One question you might ask is why would anyone want to save the company when to do a prepack and offload all debts would be so much simpler. One reason is that a prepack has a certain stigma. With a prepack stakeholders often feel that there has been some wrongdoing or that the directors are shirking their responsibilities. Stakeholders can sometimes feel that they are being left out in the cold – the director gets to keep his business but they are left with bad debts. No matter how good the motives it all seems a bit backhanded, especially since they are not consulted before the deal is done.

Sometimes the feelings run so deep that the new company ultimately fails because vital suppliers will not trade with it, or, if they do, they increase prices in an attempt to recover some of their debt.

Another reason to rescue a company is that directors often put blood, sweat and tears into building up the company and the relationships that go with it, so there is often a sentimental attachment to it and they feel it is their duty to do everything possible to save it.

Anyway, if you have what is essentially a viable company, that’s capable of trading profitably if only it could sort out its cashflow problems, wouldn’t it be better to rescue it than kill it?

The filing of the Notice of Appointment of Administrator at Court creates an instant moratorium which prevents any creditor, including landlords but excluding debenture holders, from taking any enforcement action against the company. This moratorium creates a breathing space in which to agree the best way forward to enable the company to survive.

Clearly the options available will be dependant on the individual circumstances, however, Wilkins Kennedy have the expertise to assist directors with the financial restructuring of the company. This might be the presentation of proposals for a formal company voluntary arrangement, or negotiating with creditors for an informal arrangement.

Alternatively, we can introduce directors to a variety of investors, including banks and venture capitalists, assist them with the preparation of a business plan and help with negotiations in order to secure the necessary funding. Finally we can conduct an in-depth review of the business and assist with the restructuring of business practices in order to eradicate any inefficiencies and identify cost cutting measures.