The positive side of a phoenix company

What is a phoenix company?

A phoenix company is a business acquired from a formal insolvency process, often by existing directors. This process must adhere to strict guidelines to protect creditor interests.

Phoenixism can have a bad reputation, particularly where the new entity is under the same ownership and control as the previous entity. Nevertheless, it is a part of a dynamic framework to reinvigorate business assets.

The insolvency process for a phoenix company

There is a positive side to insolvency processes. They are an important mechanism for releasing assets stifled by a legacy of debt and inefficiency into a new entity free of such drags.

There are a range of insolvency processes which can be used to free up moribund assets.

The role of a company voluntary arrangement (CVA)

A CVA is a formal arrangement under which a company’s creditors agree to release a substantial proportion of their debts on the basis that the proposal is better for them than the alternative of liquidation or administration.  The process involves an offer which must be accepted by 75% by value of unsecured creditors.

We have used the CVA process as part of an acquisition of insolvent businesses: the investor agrees to acquire the company’s shares (for £1) and introduce funds to settle historic creditors conditional upon those creditors accepting the CVA. Depending on circumstances, creditors may be settled for a small proportion of their overall claims thereby reconstructing the balance sheet of the insolvent company (whilst retaining the associated tax losses).

This process is particularly useful for companies which have unassignable contracts, licences or accreditations, where the business cannot therefore be transferred to a new entity.

The role of a pre-pack administration

In a pre-pack administration an insolvency practitioner is instructed by a company to carry out an accelerated disposal process.  The business and assets are marketed over (usually) a short period of time, an agreement is reached for the acquisition of the business and assets, and the contact is completed immediately the insolvent company formally goes into administration.

Pre-pack administrations are unpopular with legislators and with the creditor community. However, they are often the least worst result for the company’s creditors, including secured creditors, because the value of assets in such a going concern transfer (which may be all or a part of the business) is higher than would be the case in a complete cessation and liquidation, and jobs are preserved.

The role of a liquidation

The transfer of undertakings protection of employment regulations (TUPE) apply to pre-pack administrations. If a company has a significant level of contingent employee debt, and particularly if some rationalisation of the workforce is a necessary ingredient of the turnaround plan, the level of liabilities transferred under TUPE can be prohibitive.

For technical legal reasons TUPE is unlikely to apply to a liquidation transfer.

The process is less seamless than a pre-pack administration because of the need to give notice to creditors of the liquidation and the inability of the sales contract to be completed until that notice period has been expired and a liquidator appointed.  There has to be a break in trading.

If you are looking at acquiring a business from an insolvent or potentially insolvent vendor company then, despite the general principle of avoiding formal insolvency if at all possible, the use of an insolvency process as part of the acquisition process can be a valuable tool.

Our Business Recovery team can help you evaluate and structure the deal.