You will often hear the term “rescue” used about insolvent businesses. This usually involves the business actually going into administration and a number of the staff being laid off, the bank is left being owed a lot of money and so are a number of creditors.
You may have been one of those creditors who has lost out and actually the term “rescue” probably really annoys you. The business has carried on with the same directors at the same premises and most of the same staff. In fact it probably has a similar or identical name as it did before.
Why is this allowed to happen and perhaps even more so why do we, licenced insolvency practitioners, seem to help facilitate it?
The Enterprise Act of 2002 introduced a faster process for administrations. In the old days (pre 2002) we had to go to court and a have hearing before a judge to put a company into administration. It meant a lot of pre-work and also a lot of legal costs which meant really only larger businesses could afford to do it. In addition I think the UK government at the time wanted to mirror the Chapter 11 rescue procedures of the USA (although in those cases the company is protected with the existing directors still running it).
Since 2002 administration can be applied for much more quickly and in fact if there is no bank debenture it can happen on the same day (or the same day with the banks consent). So it is a quick process and it does protect a limited company or a partnership. No one can then remove any assets, enforce security or take any legal action. It really is a very effective freezing order.
So coming back to “rescue” what we mean by that term is the trade is usually saved together with some of the staff and usually quite a lot of the infrastructure of the existing business. The shell that the business was in (the limited company) is left behind and sorted out afterwards.
Even the business name can be used again if certain legal hurdles are complied with. We recently dealt with a very small business in terms of asset value. It was an internet based retailer selling toys online. Although the business had sales of one million it didn’t actually own much. It bought what it needed to sell and was based from someone’s home. In the old days we could never have used an administration to help the business as it only had assets with a total value of £12,000.
The directors had found someone local who wanted to take the business on and employ the old directors as well and keep the old business trading name. If they had closed and gone into liquidation the business would have lost its continuity and also the website would have closed. Nothing would have been left to “rescue” or save. By using a pre-pack administration we had the assets valued, advertised for sale and sold to the new owner within ten days of first meeting the directors.
There are other ways of saving a business – in particular a Company Voluntary Arrangement can be very useful when the existing business is in trouble but has to keep going e.g. because it has established work certification and qualifications that would take years to regain or insolvency would cause the breach of certain contracts.
Rescue is not just limited to industrial type businesses it can apply to law firms, estate agents or in fact just about any business.
If you feel anything in this article has raised any questions please feel free to get in touch with us.