What happens to a business when it is sold out of administration?

Understanding the implications of entering Pre-pack Administration

The administration process was designed to protect a company from creditor pressure whilst a plan for rescue or restructure is put in place. One of the exit routes from administration is the sale of a company as a going concern, and this can be made on an ‘open market’ basis or via a pre packaged sale.

Full control of the company passes to the administrators on their appointment, but in a pre pack sale out of administration, existing directors or shareholders may purchase the underlying assets of the old business to form a ‘new co.’

Begbies Traynor can help you decide the best way forward for your company, and provide professional advice on any aspect of corporate insolvency.

What is an ‘open’ sale out of administration?

If the business is deemed viable by the administrator and a good chance exists of it returning to profitability, a sale may be the best exit from administration. An ‘open’ sale involves the business being advertised on the open market, with a view to maximising creditor returns and safeguarding jobs.

The administrator takes over control of the company, and may make operational changes in an attempt to improve the company’s financial outlook. The aim during any insolvency process is to maximise creditor dividends, and a sale such as this introduces a cash lump sum that may help to repay unsecured creditors.

Issues of selling a business in this way

A common dilemma when selling a business out of administration is that remaining on the market for too long can result in a decline in value along with staff morale, but a fast sale can also mean that overall asset values are lower.

The administrator will probably reduce business costs as much as possible, and streamline the company ready for sale. Directors have no input regarding this process – control is already out of their hands, and unless they opt for a pre pack sale they cannot influence proceedings in any way.

What is a pre pack sale in administration?

This is a process during which business assets are valued and marketed prior to the administrator’s appointment. Professional guidance will already have been received by company directors as to whether a pre pack sale is appropriate in their circumstances.

Once a sale has been agreed – and in many cases, this is to connected parties such as the existing directors or shareholders – an administrator is appointed to oversee the sale of business assets.

The pre pack process can be termed a ‘closed’ sale when compared to the type of sale described earlier. Strict rules apply to a pre packaged sale, however, in order to protect creditor interests.

What are the implications of a pre pack sale?

For creditors

As the purpose of administration is to protect the company from creditor action, unsecured creditors will be largely unable to influence proceedings. They can submit their claim in writing to the administrator, and will be updated on progress throughout the administration period.

For employees

Those employees retained during the first two weeks of administration become ‘preferential creditors’ and are more likely to receive monies owed to them. Any employees transferred over to a new company will have their contracts of employment protected under TUPE, or Transfer of Undertakings (Protection of Employment), legislation.

Although in some cases, the terms and conditions of employment may be altered by the administrator, this must be done with a view to maximising the chances of success for the new business.

Employees made redundant, or who are unable to reclaim money owed by the company because of insufficient funds, can make a claim from the National Insurance Fund up to the statutory limits.

This includes up to eight weeks’ wages, up to six week’s arrears of holiday pay, unpaid pension contributions, payment for the statutory notice period if this was worked but not paid, and potentially the basic award for unfair dismissal. These claims are made via the Redundancy Payments Service.

For directors

Directors lose control over their company once the administrator is appointed. If a pre pack administration is chosen, they will need to fund the purchase of business assets themselves if no other investment is forthcoming.

On liquidation of the old company, their activities will be investigated by the IP. Should anything untoward be discovered they may face disqualification as a director, financial penalties, and personal liability for company debt.

On the purchase of a phoenix company, if arrears of tax or PAYE were owed by the old business, HMRC may decide to apply restrictions in the form of security deposit demands before trading can commence.

As the market leader for corporate insolvency, Begbies Traynor provides professional guidance for companies in distress. We offer free same day consultations, and have offices around the country.