Business Phoenixing – Is a Pre-Pack a practical way to avoid company failure?
As the recession continues to bite, increasing numbers of businesses are finding it difficult to continue trading. In this economic climate Phoenixing or Pre-Pack Administration would enable many businesses to continue to trade without the burden of servicing legacy debts.
With the continuing economic downturn, more and more businesses are finding it difficult to continue trading. Frequently these difficulties are not because customers have stopped buying completely. Rather, they are buying in reduced volumes and asking for lower prices.
In these circumstances many businesses could continue to trade if they did not have the burden of servicing legacy debts. Since the Enterprise Act of 1984, it has been possible to request relief from corporate creditors using a Company Voluntary Arrangement or CVA. With the agreement of creditors, a Company Voluntary Arrangement allows a portion of corporate debt to be repaid at a manageable rate over a set period of time, the remaining debt being written off. A high proportion of early failures of the arrangement has led to much criticism of the process by creditors and insolvency professionals alike. The main argument against the CVA is that the fundamental structure of the business and its management team do not change. As such, even if the burden of legacy debt is lifted, the reasons for past failures are not likely to be resolved in the future.
Given the criticism levied against a Company Voluntary Arrangement, the process of Phoenixing (also known as Pre-Pack sale in liquidation or administration) has become more widely considered as a practical way of saving a business. Phoenixing is simply where a new company is formed which then buys the assets, contracts and goodwill of the failing business for a reasonable market rate. The legacy debt is left within the old business which is then liquidated thus allowing the new Phoenix business to trade on, debt free.
Since the beginning of this year, much comment has been made about the Phoenix process in the media. Very often this has taken a negative stance because of the fact that creditors are left with unpaid debts which may in turn lead them to suffer their own financial difficulties. The fact that these companies were already failing is often ignored in these published arguments. The reason for the failure was the company’s inability to continue to trade. In these circumstances, liquidation was extremely likely if not inevitablewhether or not a Phoenix process took place. As such creditors would always have been out of pocket.
Another criticism of Phoenixing is that creditors are not afforded the right to reject the new company’s proposal to purchase the business assets from the failing company. However, it is widely recognised that to go through an open process of sale due to failure (often using administration) often destroys many of a company’s valuable assets such as good will and contractual obligations. In addition, discussing matters with creditors before a potential sale of assets opens the possibility of the creditor taking unilateral recovery action which may well be detrimental. As such, a Pre Packaged sale will actually deliver the best possible return to creditors. From November 2008 Creditors have been afforded better protection with the Insolvency Service publishing guidelines which require insolvency practitioners to ensure full market value is paid for the assets and provide a report to creditors of why this action is more beneficial to them.
The arguments for the Phoenix process are compelling.
– The new business is not saddled with the historic debt
– There is no obligation for debt repayment
– It allows the introduction of new procedures and ways of working
– Inappropriate location or lease agreements are not retained giveing every opportunity for sucess
– Far better chance of jobs being saved compared with Liquidation
Given these advantages it seems certain that Phoenixing will be seriously considered by many business owners trying to manage the issues of a failing company. This is not to say that the process will be right in every situation. However, with increasing numbers of businesses under financial pressure and at risk of failure, Phoenixing must certainly be given serious consideration.
Resources:
Derek Cooper is Managing Director of Cooper Matthews Limited http://coopermatthews.com and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services Advice providing straight forward insolvency advice for businesses with financial problems. They have significant experience in working with small to medium sized businesses.
More expert advice on Phoenixing http://coopermatthews.com/phoenixing.html
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