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). We describe the options and explain why.
If your business is in financial trouble 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 in turn leave the directors at risk of personal insolvency.
Pre pack administration(also known as Phoenixing) is often an extremely good method of rescuing a struggling business. In simple terms 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 (which will show on the directors account in the books), 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?
Clearly where directors are likely to be pursued by a liquidator for debt, then the option of using pre pack admin for company turnaround has to be a non starter. 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. Creditors are prepared to accept these sort of arrangements because the alternative for them if the company is liquidated is likely to significantly worse financially.
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 Business Rescue. 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.
Author Resource:
Find out more about how these solutions could help your financial troubles: http://coopermatthews.com/company-voluntary-arrangement.html http://coopermatthews.com/phoenixing.html Derek is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.
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