It is clear that increasing numbers of businesses are struggling under the current economic conditions. The insolvency service statistics published on the 1st May 2009 showed the number of companies going into liquidation in the first three months of 2009 was over 50% higher than during the same three months the previous year.
One of the potential ways of rescuing a failing business is
Pre-Pack Liquidation (commonly known as
Phoenixing). This solution has been much discussed during 2009 and is where a new company is set up and an agreement made to buy the assets and goodwill of the older failing business before it is liquidated. Once the transaction is completed, the old company is then wound up and the new business can trade on.
Pre-pack liquidation can be a very good way of rescuing a business which is failing due to the burden of legacy debt or unwanted / unfavourable lease agreements. It can ensure continuity of supply to customers and safeguard jobs which are transferred to the new company under the same working conditions (following the rules of TUPE - Transfer of undertaking and permanent employment).
One of the things holding them back which company directors need to think about when considering a pre-packing solution is their ability to fund the purchase of the old company's assets and good will. If a pre-pack is to be considered, the old company's assets must first be properly valued. If the business owns a significant amount of plant and equipment, this could amount to a considerable sum which the directors / owners of the new business must find in order to buy the pre-packaged assets. With the challenges obtaining bank loans at the moment this can prove extremely difficult to finance.
Because of this, more and more pre-pack liquidations are being funded through
asset refinancing. Using this process, money is lent to the directors of a new company on the basis of the asset value of equipment which is owned by the old business. A sale and purchase agreement for the old business assets is drawn up. The money required for the purchase is then lent to the new business on the basis of it being secured against the assets which will be transferred. Generally, as well as the security provided by the assets themselves, the directors of the new business will also have to personally guarantee the repayment of the finance. However, this situation is to be expected and is no different to the requirements of standard lending.
I have recently been involved with a number of pre-pack liquidation solutions where asset refinancing has provided a very good way to raise the finance necessary for the purchase of the old business' assets. Normally these examples have been where the old business has assets of significant value which must be reasonably paid for but at the same time can stand as good security for a loan taken by the new business. I believe that pre-pack liquidations, where managed properly are an excellent way of rescuing a business. Given asset refinancing can overcome one of the barriers to enabling pre-packs, the use of this tool can only help in this area.
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Derek Cooper is Managing Director of Cooper Matthews Limited, and a member of the Turnaround Management Association UK.
Derek worked for 11 years as a financial advisor for Allied Dunbar, moving on to the J Rothschild Partnership. Before founding Cooper Matthews, Derek was the Managing Director of Wilson Philips specialising in personal insolvency and financial restructuring.
Derek's experience of both corporate insolvency and business management puts him in a unique position to be able to understand the challenges facing businesses in today's economic environment.
For more information visit
http://coopermatthews.com/business-refinancing.html
