According to the latest Insolvency Service figures for England and Wales published on 1st May 09, nearly 5000 companies went into liquidation in the first quarter of 2009. This figure is over 50% higher than the same quarter of 2008. Clearly the global recession together with the lack of available credit due to the credit crunch, is having a significant downward effect on business activity. Many analysts believe that the recession will continue until the end of 2009 at least and that its effects will continue to be felt well into 2010.
With increasing numbers of businesses finding themselves in serious trouble, more and more company directors and shareholders are faced with a decision whether to invest more of their own funds into the business to allow trading to continue. Even if such funds can be made available, they are best spend helping to develop and improve the current business model – e.g. on advertising, marketing, investment in plant etc. However, all too often the money is likely to be swallowed up paying for legacy debts. With this reality, potential investors are all the more likely to decide that the further investment is not sensible and the better option is to call it a day and allow the business to be wound up.
Clearly in the current economic climate, the focus from Government down is to promote trade and growth rather than business failure. As such, it is important to consider how businesses can be preserved and new investment can be focused on giving a troubled business a new lease of life. The process of business Phoenixing is widely regarded as a practical method of achieving this goal.
Phoenixing (also known as Pre-Packing) is the process by which the sound elements of a failing business can be packaged up and purchased by a new company. The new company then starts to trade in the same business space but without the burden of legacy debts and onerous or unwanted property or leases. As a result, investment funds are targeted specifically at investing in the growth of the business giving it the best chance of success.
The Phoenix process is relatively straight forward. Firstly the assets of a business including any good will are properly valued. A new company is formed and investment funds are deposited within the new business. A Sale and Purchase agreement is then drawn up detailing the assets of the old business and the amount required to purchase them based on the valuation. The old company is then liquidated. Immediately or shortly after the liquidation, the Administrator then effects the sale of the business assets to the new company as per the Sale and Purchase agreement. The proceeds of the sale are distributed to the old company’s creditors.
Much media comment has been focused on the Phoenix process particularly in the first quarter of 2009. One of the concerns raised is that the creditors of the old failed business are left with little hope of full repayment. Unfortunately this is often the reality. However, it is important to recognise that this situation is a direct result of the failure of the old business. Where a business is struggling, if additional investment is not forthcoming then it will fail and face liquidation. In this situation, it is highly likely that creditors will not be paid in full. As such, even if a Phoenix business is started, the position that creditors find themselves in is due to the old company failure and not a direct result of the Phoenix process itself.
In fact, the pre-packed sale of the old business assets to the Phoenix company may often get the best possible return for creditors. This is because the value of the business which may largely be made up of current contracts and good will, is often far higher if it can be sold as a package to a new Phoenix business. If the failed business is liquidated or put into administration, the subsequent value of simply selling any physical assets and distressed stock will almost certainly be lower thus getting a far worse return for creditors.
In addition to improved creditor returns, the Phoenix process offers other significant advantages. In particular, a new trading company is formed which has the ability and capacity to continue to trade with suppliers and customers this preserving future revenue streams for them despite their potential losses suffered from the previous failed business. Often the new Phoenix company will occupy the same premises as the old business thus protecting landlord’s rents. In addition, employment is protected as the new business will want to take many of the old employees whose employment will be protected under TUPE (Transfer of Undertaking and Protection of Employment) rules.
Given the significant advantages, directors and shareholders would do well to consider the Phoenix process while deciding how to resolve the problem of a failing businesses. Clearly, Phoenixing is not right for all situations and independent advice must be sought from a business insolvency advisor. However, in these troubled economic times, all options for preserving business and employment must be investigated and Phoenixing is certainly able to aid this process.
