Insolvency Prepack Administration - Case Study Number 2 - Prepacks, Administration & Management Buy Outs
Administration & Management Buy Out
This illustrative Insolvency Administration case study shows how a prepackaged administration or prepack actually works. In this particular case we show how an Administration followed by a Management Buy Out is organised.
The directors of a fictional company which we call for the purposes of this case study Brightyellow Exeter Limited realised that the company had entered a downward financial spiral. The directors found themselves in a catch-22 situation in that the company had insufficient funds to finance the redundancy packages and other one off costs that a re-organisation would involve.
Brightyellow Exeter Ltd was not exposed to any winding up petitions but creditors were being paid only when their invoices had become overdue for payment. Entire layers of overhead needed to be removed from the business so that the organisation could once again concentrate on its core business.
Review by the Insolvency Practitioner (IP)
The IP's review led the directors of the Exeter company to conclude that "the business" of the company could only survive if the business was sold as a going concern. Members of management had expressed an interest in buying out the company.
The directors and the IP worked out a proposed package for the sale of the business to management. A prepackaged "deal" was then provisionally agreed with the management.
Appointment of Administrator
The directors of Brightyellow Exeter Ltd then appointed the IP as administrator to the company. There was no need for an application to court in the particular circumstances that obtained.
The fact that an administration was in place froze all previous creditors.
The administrator forwarded his report and the "pre-packaged" proposal to all of the creditors. A creditors meeting was then held. At the creditors meeting the creditors resolved to approve the sale package provided one or two matters relating to the terms of the proposed sale were changed.
Brightyellow Exeter Limited realised much more as a result of this going concern sale than would have been achieved if there had been a forced sale of assets. Following the sale the administrator paid off all of the creditors arising from his trading period and settled the banks charge and the preferential creditors.
The administrator then held a surplus of £100,000 (which was the approximate sum anticipated in the original proposal). The £100,000 was then handed over to a liquidator who was able to pay a dividend of 35 pence in the pound to the unsecured creditors. The administrators initial report had shown that those creditors would have been unlikely to have received anything at all if the company's business had not been sold under the Management Buy Out arrangements.
An administration supported by a prepack can bring benefits to your company as this case study reveals