What Happens When a Business Is Sold out of Administration or InsolvencyMay 17, 2017
Earlier this year, Alfreton-based packaging company Charapak entered administration after key client losses and bad debt rendered them unable to pay their bills.
Judging by previous newspaper reports about administration failures, you’d be excused for thinking Charapak was destined for the scrap heap with a raft of job losses looming.
However, that couldn’t be further from what happened.
On 13th March, Charapak was bought out of administration by its bosses, saving 85 jobs and the business.
In this article, I’m going to explore what happens to a business when it enters administration (or another form of insolvency) and a buyer can be found.
What is administration?
An administration is a formal rescue procedure designed to provide a better outcome than a liquidation. An administrator can be appointed by the company's directors or its creditors, including the bank.
An administration can be thought of as throwing a safety net over a business to protect it from its creditors while the administrator (who must be an insolvency practitioner) assesses the business and tries to rescue it.
Once they have been appointed, the administrator takes over control of the company and, in effect, replaces the directors.
During an administration, the creditors (including landlords and HP companies) are restricted in taking any action against the company. An administration can normally last up to 12 months, although this can be extended.
What happens when a company goes into administration?
When a company enters administration, the administrator assumes complete control over the company's business and assets.
The administrator takes over responsibility for running the company with the key goal of getting the best possible outcome for its creditors.
If the business, or parts of it, are viable, the best outcome for creditors will be for the business or parts of it to be saved as a going concern.
(The simple fact is that higher prices are paid by purchasers for ongoing businesses rather than simply buying assets from a closed down business.)
Therefore, a good insolvency practitioner will always consider whether the business can be continued and sold eventually as a going concern — or even whether the company itself can be rescued and returned to profitable trading.
Exit Routes out of administration
The company itself may be rescued and exit administration in one piece.
Alternatively, if the company itself cannot be rescued, the business (or parts of the business) might be sold as a going concern.
The last resort is that no part of the business can be rescued as a going concern and the business is closed down and its assets are sold off.
The outcome of an administration is totally dependent on the company's individual circumstances but can be influenced positively by appointing a good insolvency practitioner at an early enough stage.
Can the company or business recover?
Sometimes (albeit quite rarely) businesses that may be healthy in the long-term and need the protection of administration to allow time for the rescue or restructuring process to be executed.
Following the restructuring, the company exits administration either by the ending the administration or via a Company Voluntary Arrangement.
While only companies can enter administration, it is possible (with a good insolvency practitioner and favourable circumstances) for companies and businesses to be saved under any form of insolvency appointment — even liquidation.
Can parts of the company or business recover?
While the company itself cannot be rescued, parts of its business often can. The other parts — the bits that may have dragged the whole business down — can be closed.
An administrator will quickly assess whether there are any viable parts of a business and seek to keep these trading whilst a buyer is sought for the "good" parts of the business.
Administrators often have more tools at his or her disposal and fewer constrains than the company's directors, allowing the administrator to better identify and save the good parts of the business.
As I mentioned above, while only companies can enter administration, it is possible (with a good insolvency practitioner and favourable circumstances) for parts of companies and businesses to be saved under any form of insolvency appointment — even liquidation.
If there is a viable business involved and the liquidator is good enough, a liquidation can still result in the rescue of all or part of the business.
Who buys the business or parts of the business?
The administrator's primary duty is to maximise the amount of money for the creditors. This is the same for all types of insolvency.
How they best achieve this, however, is up to their professional judgement.
When selling a business or its assets, the administrator must be able to prove that the best possible price was achieved. They must be able to prove this regardless of whether the purchaser is an independent third-party or someone who is already involved in the company.
Often a creditor's initial gut reaction is that it cannot possibly be right that the previous business owner buys the business and/or assets and carries on. Cynically, they think they've done a dodgy deal, dumped all the liabilities and gotten away with nothing short of theft!
However, the reality is that previous business owners and directors can often be the ones who offer the highest price and so a sale to them generates the greatest recovery for creditors.
In these cases, the insolvency practitioner will be able to demonstrate that this was the best price. For example, they may compare the accepted price to an independent expert valuer's report.
What about pre-pack sales?
Unfortunately, it can get even more complicated with pre-package (pre-pack) sales.
A pre-pack sale is where the sale of the business has been agreed before the insolvency and is completed immediately upon the appointment of the insolvency practitioner.
This means the business was probably not exposed to the market in a sale process and it is often the original business owners who buy the business back.
It is, therefore, easy to understand why an outsider/creditor will question whether this was the right thing to do.
There are very strict rules and regulations surrounding this sort of process but rather than bore you with the technical details I'll simply say that the insolvency practitioner, as in all insolvencies, still has to be able to prove that this provided the best outcome for creditors and that trading the business in insolvency and taking time to market it publicly simply wasn't possible or would have reduced the price that was achievable.
Is Your Business in Trouble?
The insolvency industry has a bad press image. Normally the press only reports the bad news in relation to insolvencies, concentrating on the jobs lost rather than the jobs saved, the shutdowns rather than the going concern sales.
The successes — the businesses that have been rescued and jobs that have been saved — simply don’t get column inches because that doesn't sell papers. Also, much of the rescue work carried out by insolvency practitioners is done behind the scenes and is confidential.
Administration or any type of Insolvency does not mean the end.
Businesses (or parts of them) successfully exit administration or insolvency every week, saving tens, hundreds or thousands of jobs.
Ultimately, the success of a rescue will come down to the skill and experience of the insolvency practitioner appointed. Choose the right person and they will be able to save a business — so long as there’s a viable business there.
The most important thing for directors and business owners is to seek help as soon as you suspect your business is in trouble. The more time an insolvency practitioner has to work with you, the more likely they are to achieve a positive outcome.