Phoenixing or Pre-Pack Administration - What is it?
Phoenixing or Pre-Packing are commonly used names for the business insolvency procedure known as Pre-Pack Administration.
Pre-Pack Administration is a process whereby the directors of an insolvent company start a new business which then agrees to buys the assets of the old failing business.
The process of actioning a (PPA) is specific and define.
Instead of putting additional resources into an already failing and insolvent company the directors are able to use the same funds to set up a new company and acquire the assets of the old.
The viable parts of the old business are transferred to the new company allowing it to begin to trade successfully without the weight of the old company's debts and other liabilities. The liabilities of the old business such as outstanding debts and unfavourable lease agreements and other credit contracts remain in the old company which is then normally put into administration and liquidated.
Because the new company seemingly appears from the remnants, or ashes of the old, this practice is known as phoenixing.
In a number of cases WestCorp clients already have a Business Insolvency Cover Plan in place and as such many of the assets are already accrued to the (BICP). The plan is then converted into the new trading business within days of the demise of the insolvent company.
Phoenixing with an BICP enables a company to start over again with profitable elements of the failed business, offering continuity for both suppliers and employees.
When To Use Phoenixing or Pre-Pack Administration?
Phoenixing is normally considered where a company is at risk of failure because it is facing serious financial difficulties due to cummulative historical debts or unfavourable lease or finance agreements. However, despite this situation, the core business is profitable based on its month to month trading and therefore worth saving.
Where the current directors believe that the business is viable if it were free from its historic debt liabilities, then Pre Pack Administration or Phoenixing with a Business Insolvency Plan can be a very useful vehicle to allow this process.
How does a WestCorp Pre-Pack Administration Work?
The directors of the old business normally have a Business Insolvency Cover Plan in place or they would approach WestCorp and instruct a new company incorporation literally a Phoenix company. The viable core of the failing business is then valued and pre-packaged for sale to the new Phoenix company. The sale of all or part of the old company's assets is negotiated with the new Phoenix company's owners before the old business is put into administration.
It is not necessary to involve the failing business's creditors with this negotiation or gain their approval. However, there are of course strict procedures to be followed on valuation and disclosure of such a deal to the creditors. The administrator will ensure that the best price is obtained for the assets, and be required to give a detailed explanation and justification of why the pre-packaged sale was undertaken.
As soon as the old company is put into administration, the administrator affects the sale of the business assets to the new Phoenix business. The proceeds of the sale are distributed to the old company's creditors and then the old company is normally then liquidated by the administrator.
It may seem strange that an administrator has the power to sell business assets without the prior approval of the creditors or the permission of the court. The reasoning behind this is that a swift sale of the business assets is the best opportunity to preserve their value. As such, the best possible return for the creditors can be realised and give the new company the best possible opportunity for success.
If a failing business is not pre-packed and simply put into administration, the value of its assets may swiftly reduce for some of the following reasons:
*The fact that a company is in administration must be written on all communications. It therefore becomes widely known and the good will of the business is likely to be degraded.
*If trading while in administration, a company may be in breach of existing contractual arrangements with customers and suppliers. If these agreements were to un-ravel, significant measurable value in the business may be lost.
*It is difficult to raise new finance to support the ailing business while in administration as the investor will not get any priority of repayment over existing creditors and thus will be reluctant to inject money into the company (this is unlike Chapter 11 laws in the USA where the new investor will be given priority repayment protection at the outset).
In the face of these difficulties, it is logical that if the assets of the business can be valued and agreed before the administration process, the creditors stand to gain the maximum possible return and the new company has the best possible opportunity of success.
The best approach though is to have a BICP in place long before any troubles appear, that way the directors risks of legal actions regarding assets sales in a normal Pre-Pack are greatly reduced as the BICP already has security over the old companies assets.
The Advantage of a WestCorp Phoenixing or Pre-Pack:
There are a number of reasons why Phoenixing can be a very sensible way to deal with an ailing insolvent company:
*Minimum Disruption to the Core Business.
Very often, the result of a company being put into administration will be that business assets are split up and sold to any number of buyers. The core business is lost and the remaining shell of a company is wound up. A phoenix company will preserve the core business and its assets together and possibly continue to trade without staff and customers seeing significant disruption.
*Preservation of the full company Brand.
Part of the sale of the old company's assets within a Pre-Pack administration would be the brand and good will of the old business. If a company simply goes into administration this brand and good will may be lost. With Pre-Pack administration, the new Phoenix company can continue to take advantage of the brand value.
*Preservation of the jobs.
Significant business advantage can be gained where current employees and teams can be kept together. A new Phoenix business will give the maximum opportunity for employees to remain employed and minimise redundancy particularly as Transfer of Undertaking and Protection of Employment laws must be adheared to.
*Maintainence of trade with existing suppliers and customers.
When a new sustainable business can be introduced where the previous company was failing, this will give the maximum opportunity for customers and suppliers to continue to trade with the new company. Clearly, there may be outstanding debts from the old company. However, these would exist regardless and therefore better have the opportunity to preserve future business with a new Phoenix company than none where a business is simply liquidated.
The Disadvantages with a WestCorp Phoenixing Pre-Pack:
There is a significant issue with the Phoenixing process which is often raised and which should be considered. This is that the creditors of the old company are left with unpaid debts which in turn may cause other businesses to fail.
However, the Phoenix process is not the reason why creditors lose money. Creditors lose money because a company is already failing or has failed. In this situation, it is likely that the old business will be put into administration and or wound up. As such, the fact that the creditors will lose out is inevitable.
The fact that creditors are owed money which they are unlikely to get back is not a product of the Phoenix process. This would have happened anyway. As such, the option of a phoenix or pre-pack should be compared to company liquidation or other likely outcomes, not the impossible dream of creditors being paid in full.
Phoenixing Frequently Asked Questions:
Will a phoenix company take the old business liabilities on board?
Except for the employees Transfer of Undertakings & Protection of Employment claims, which will be transferred to the phoenix company, if agreed, all liabilities remain with the old company, which goes into Administration and then is likely to be liquidated.
If a phoenix company wishes to take over assets subject to hire purchase or lease and financial agreements it will be up to directors to negotiate new terms with the HP or leasing companies.
Will the phoenix company have a right to trade from the old company's premises?
*Freehold premises. If the phoenix company does not acquire the premises it may occupy them under license from the Administrator until the premises are sold. The phoenix company can be granted a license to occupy the property until the sale is completed, should it wish to purchase the property.
*Leasehold premises. The landlord would not normally allow the phoenix company to automatically take an assignment of the lease. However, the phoenix company could be granted a license by the Administrator to occupy the premises until a new agreement is signed with the landlord if this is required by the new business.
Should creditors be told?
Creditors will not normally be involved in the negotiations regarding the sale of the old company assets before the old business is put into administration. There are of course strict procedures to be followed regarding the asset valuation.
Once the old business is put into administration, all creditors will be told under the normal administration rules and procedures. Once appointed, the administrator will ensure that the best price is obtained for the assets, and be required to give a detailed explanation and justification of why the pre-packaged sale was undertaken.
Should customers be told?
No. However if they are debtors and not purchased by phoenix company as an asset the Administrator, Administrative Receiver or Liquidator will write to them requesting payment of the outstanding amount.
What happens to employees?
All employees and their accumulated rights such as holidays etc. must transfer to the new company under Transfer of Undertakings law. It is not possible to choose which employee would go.
At that stage legal advice is advised regarding the employees rights and the potential liability to the new phoenix company.
How long can the whole process take?
If you already have a WestCorp Business Insolvency Cover Plan: in place then within 24 Hrs.
If you are starting from scratch and require a new company then given that the negotiation for the purchase of the old company's assets as well as various related insolvency and legal matters, the whole process can take up to 7 days. It is generally driven by the financial pressures that the failing company is experiencing and the need for the Administrator to protect the assets for the creditors.
Will a Director's Disqualification Report (D Report) be issued?
A Disqualification Report will be submitted to BERR (Department for Business, Enterprise and Regulatory Reform - formally known as the DTI) by the Administrator or Liquidator of the old company (Office Holder) regarding the conduct of the directors during their stewardship of that business.
It is important to note that such a report will be completed for the Directors of the old business that has been put into Administration. The report does not focus on the new phoenix company or any directors of the new business who were not directors of the old company.
What will Phoenixing or Pre-Pack cost?
WestCorp will provide an initial consultation free of charge. In most cases this will include a review of the business to establish the current financial status and possible solutions.
When a client/s decide what option to take WestCorp will provide full details of the fees involved.
For further details please contact Mr Steve Howard by email: steve.h@westcorp-uk.com (Corporate Services) or call the number below.
Phoenixing or Pre-Packing are commonly used names for the business insolvency procedure known as Pre-Pack Administration.
Pre-Pack Administration is a process whereby the directors of an insolvent company start a new business which then agrees to buys the assets of the old failing business.
The process of actioning a (PPA) is specific and define.
Instead of putting additional resources into an already failing and insolvent company the directors are able to use the same funds to set up a new company and acquire the assets of the old.
The viable parts of the old business are transferred to the new company allowing it to begin to trade successfully without the weight of the old company's debts and other liabilities. The liabilities of the old business such as outstanding debts and unfavourable lease agreements and other credit contracts remain in the old company which is then normally put into administration and liquidated.
Because the new company seemingly appears from the remnants, or ashes of the old, this practice is known as phoenixing.
In a number of cases WestCorp clients already have a Business Insolvency Cover Plan in place and as such many of the assets are already accrued to the (BICP). The plan is then converted into the new trading business within days of the demise of the insolvent company.
Phoenixing with an BICP enables a company to start over again with profitable elements of the failed business, offering continuity for both suppliers and employees.
When To Use Phoenixing or Pre-Pack Administration?
Phoenixing is normally considered where a company is at risk of failure because it is facing serious financial difficulties due to cummulative historical debts or unfavourable lease or finance agreements. However, despite this situation, the core business is profitable based on its month to month trading and therefore worth saving.
Where the current directors believe that the business is viable if it were free from its historic debt liabilities, then Pre Pack Administration or Phoenixing with a Business Insolvency Plan can be a very useful vehicle to allow this process.
How does a WestCorp Pre-Pack Administration Work?
The directors of the old business normally have a Business Insolvency Cover Plan in place or they would approach WestCorp and instruct a new company incorporation literally a Phoenix company. The viable core of the failing business is then valued and pre-packaged for sale to the new Phoenix company. The sale of all or part of the old company's assets is negotiated with the new Phoenix company's owners before the old business is put into administration.
It is not necessary to involve the failing business's creditors with this negotiation or gain their approval. However, there are of course strict procedures to be followed on valuation and disclosure of such a deal to the creditors. The administrator will ensure that the best price is obtained for the assets, and be required to give a detailed explanation and justification of why the pre-packaged sale was undertaken.
As soon as the old company is put into administration, the administrator affects the sale of the business assets to the new Phoenix business. The proceeds of the sale are distributed to the old company's creditors and then the old company is normally then liquidated by the administrator.
It may seem strange that an administrator has the power to sell business assets without the prior approval of the creditors or the permission of the court. The reasoning behind this is that a swift sale of the business assets is the best opportunity to preserve their value. As such, the best possible return for the creditors can be realised and give the new company the best possible opportunity for success.
If a failing business is not pre-packed and simply put into administration, the value of its assets may swiftly reduce for some of the following reasons:
*The fact that a company is in administration must be written on all communications. It therefore becomes widely known and the good will of the business is likely to be degraded.
*If trading while in administration, a company may be in breach of existing contractual arrangements with customers and suppliers. If these agreements were to un-ravel, significant measurable value in the business may be lost.
*It is difficult to raise new finance to support the ailing business while in administration as the investor will not get any priority of repayment over existing creditors and thus will be reluctant to inject money into the company (this is unlike Chapter 11 laws in the USA where the new investor will be given priority repayment protection at the outset).
In the face of these difficulties, it is logical that if the assets of the business can be valued and agreed before the administration process, the creditors stand to gain the maximum possible return and the new company has the best possible opportunity of success.
The best approach though is to have a BICP in place long before any troubles appear, that way the directors risks of legal actions regarding assets sales in a normal Pre-Pack are greatly reduced as the BICP already has security over the old companies assets.
The Advantage of a WestCorp Phoenixing or Pre-Pack:
There are a number of reasons why Phoenixing can be a very sensible way to deal with an ailing insolvent company:
*Minimum Disruption to the Core Business.
Very often, the result of a company being put into administration will be that business assets are split up and sold to any number of buyers. The core business is lost and the remaining shell of a company is wound up. A phoenix company will preserve the core business and its assets together and possibly continue to trade without staff and customers seeing significant disruption.
*Preservation of the full company Brand.
Part of the sale of the old company's assets within a Pre-Pack administration would be the brand and good will of the old business. If a company simply goes into administration this brand and good will may be lost. With Pre-Pack administration, the new Phoenix company can continue to take advantage of the brand value.
*Preservation of the jobs.
Significant business advantage can be gained where current employees and teams can be kept together. A new Phoenix business will give the maximum opportunity for employees to remain employed and minimise redundancy particularly as Transfer of Undertaking and Protection of Employment laws must be adheared to.
*Maintainence of trade with existing suppliers and customers.
When a new sustainable business can be introduced where the previous company was failing, this will give the maximum opportunity for customers and suppliers to continue to trade with the new company. Clearly, there may be outstanding debts from the old company. However, these would exist regardless and therefore better have the opportunity to preserve future business with a new Phoenix company than none where a business is simply liquidated.
The Disadvantages with a WestCorp Phoenixing Pre-Pack:
There is a significant issue with the Phoenixing process which is often raised and which should be considered. This is that the creditors of the old company are left with unpaid debts which in turn may cause other businesses to fail.
However, the Phoenix process is not the reason why creditors lose money. Creditors lose money because a company is already failing or has failed. In this situation, it is likely that the old business will be put into administration and or wound up. As such, the fact that the creditors will lose out is inevitable.
The fact that creditors are owed money which they are unlikely to get back is not a product of the Phoenix process. This would have happened anyway. As such, the option of a phoenix or pre-pack should be compared to company liquidation or other likely outcomes, not the impossible dream of creditors being paid in full.
Phoenixing Frequently Asked Questions:
Will a phoenix company take the old business liabilities on board?
Except for the employees Transfer of Undertakings & Protection of Employment claims, which will be transferred to the phoenix company, if agreed, all liabilities remain with the old company, which goes into Administration and then is likely to be liquidated.
If a phoenix company wishes to take over assets subject to hire purchase or lease and financial agreements it will be up to directors to negotiate new terms with the HP or leasing companies.
Will the phoenix company have a right to trade from the old company's premises?
*Freehold premises. If the phoenix company does not acquire the premises it may occupy them under license from the Administrator until the premises are sold. The phoenix company can be granted a license to occupy the property until the sale is completed, should it wish to purchase the property.
*Leasehold premises. The landlord would not normally allow the phoenix company to automatically take an assignment of the lease. However, the phoenix company could be granted a license by the Administrator to occupy the premises until a new agreement is signed with the landlord if this is required by the new business.
Should creditors be told?
Creditors will not normally be involved in the negotiations regarding the sale of the old company assets before the old business is put into administration. There are of course strict procedures to be followed regarding the asset valuation.
Once the old business is put into administration, all creditors will be told under the normal administration rules and procedures. Once appointed, the administrator will ensure that the best price is obtained for the assets, and be required to give a detailed explanation and justification of why the pre-packaged sale was undertaken.
Should customers be told?
No. However if they are debtors and not purchased by phoenix company as an asset the Administrator, Administrative Receiver or Liquidator will write to them requesting payment of the outstanding amount.
What happens to employees?
All employees and their accumulated rights such as holidays etc. must transfer to the new company under Transfer of Undertakings law. It is not possible to choose which employee would go.
At that stage legal advice is advised regarding the employees rights and the potential liability to the new phoenix company.
How long can the whole process take?
If you already have a WestCorp Business Insolvency Cover Plan: in place then within 24 Hrs.
If you are starting from scratch and require a new company then given that the negotiation for the purchase of the old company's assets as well as various related insolvency and legal matters, the whole process can take up to 7 days. It is generally driven by the financial pressures that the failing company is experiencing and the need for the Administrator to protect the assets for the creditors.
Will a Director's Disqualification Report (D Report) be issued?
A Disqualification Report will be submitted to BERR (Department for Business, Enterprise and Regulatory Reform - formally known as the DTI) by the Administrator or Liquidator of the old company (Office Holder) regarding the conduct of the directors during their stewardship of that business.
It is important to note that such a report will be completed for the Directors of the old business that has been put into Administration. The report does not focus on the new phoenix company or any directors of the new business who were not directors of the old company.
What will Phoenixing or Pre-Pack cost?
WestCorp will provide an initial consultation free of charge. In most cases this will include a review of the business to establish the current financial status and possible solutions.
When a client/s decide what option to take WestCorp will provide full details of the fees involved.
For further details please contact Mr Steve Howard by email: steve.h@westcorp-uk.com (Corporate Services) or call the number below.
Westcorp - 4th Floor 59 Piccadilly Manchester M1 2AQ. Tel 0161 332 5034 Switchboard 0871 566 1503.
*** AT WESTCORP - WHEN ALL ELSE FAILS - WE DON'T - OFFERING FREE ADVICE & HELP 24/7 ***
*** AT WESTCORP - WHEN ALL ELSE FAILS - WE DON'T - OFFERING FREE ADVICE & HELP 24/7 ***