Business,Phoenixing,Pre,Pack,p business, insurance Business Phoenixing – Is a Pre Pack a practical way to avoid

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As the recession continues to bite,more and more businesses are finding it difficult to continue trading. However,very often these difficulties are not because customers have stopped buyingcompletely. Rather, they are buying in reduced volumes and asking for lowerprices. Facing these circumstances, manybusinesses could continue to trade if they did not have the burden of servicinglegacy debts. Since the Enterprise Act of 1984, it has been possible to requestrelief from corporate creditors using a Company Voluntary Arrangement or CVA.With the agreement of creditors, a CVA allows a portion of corporate debt to berepaid at a manageable rate over a set period of time, the remaining debt beingwritten off. However, this procedure has long been criticised by both creditorsand insolvency professionals alike due to the high percentage of earlyfailures. The main argument against the CVA is that the fundamental structureof the business and its management team do not change. As such, even if theburden of legacy debt is lifted, the reasons for past failures are not likelyto be resolved in the future. Given the criticism levied againstCVAs, the process of Phoenixing (also known as Pre Pack sale in liquidation oradministration) has become more widely considered as a practical way of savinga business. Simply put, the act of Phoenixing is where a new company is formedwhich then buys the assets, contracts and goodwill of the failing business fora reasonable market rate. The legacy debt is left within the old business whichis then liquidated thus allowing the new Phoenixbusiness to trade on, debt free.    Since the beginning of 2009, muchcomment has been made about the Phoenixprocess in the media. Very often this has taken a negative stance because ofthe fact that creditors are left with unpaid debts which may in turn lead themto suffer their own financial difficulties. However, what has been largelyoverlooked in these published arguments is the reason for the failing companyis not the Phoenixprocess. The reason for the failure was the company’s inability to continue totrade. In these circumstances, liquidation was extremely likely if notinevitable whether or not a Phoenixprocess took place. As such creditors would always have been out of pocket.A further criticism of Phoenixing is that creditorsare not afforded the right to reject the new company’s proposal to purchase thebusiness assets from the failing company. However, it is widely recognised thatto go through an open process of sale due to failure (often usingadministration) often destroys many of a company’s valuable assets such as goodwill and contractual obligations. In addition, discussing matters with creditorsbefore a potential sale of assets opens the possibility of the creditor takingunilateral recovery action which may well be detrimental. As such, a PrePackaged sale will actually deliver the best possible return to creditors.Creditors are afforded increasing protection in terms of getting the best dealwhen the old business assets are sold. In November 2008, the Insolvency Servicepublished strict guidelines for this area in the form of SIP (Statement ofInsolvency Practice) 16 which requires insolvency practitioners to ensure thatproper market value is paid for the assets and a full report of why this wasbeneficial to creditors must be submitted to them. The arguments for the Phoenix process are compelling. There is theobvious advantage that the new business is not saddled with the old company’sdebts. In addition, unlike a CVA, there is no obligation for debt repayment.Fundamentally and unlike the CVA, a Phoenixallows a new business to begin with the introduction of new procedures and waysof working. All or part of the management team may remain the same. However,inappropriate property location or lease agreements are not taken on by the newcompany giving it every chance of success. In addition, the new Phoenix company will offera far better chance that employees’ jobs are protected than if the businesswere simply liquidated. TUPE (Transfer of Undertakings and Protection ofEmployment) rules apply meaning that the maximum number of jobs are saved.Given these advantages it seems certain thatPhoenixing will be seriously considered by many business owners trying tomanage the issues of a failing company. This is not to say that the processwill be right in every situation. However, with increasing numbers ofbusinesses under financial pressure and at risk of failure, Phoenixing mustcertainly be given serious consideration.