The problem
My hotel business is on the verge of insolvency. I am considering a "pre-pack" administration arrangement, as I would like to avoid losing my business but cannot continue with my debt at its current level. Would this be the best option for my business, and how would my suppliers be affected by this move?
The law
The lack of regulation relating to pre-packs has caused confusion and suspicion among creditors and business owners alike. However, a new set of guidelines published by the Insolvency Service, which came into force on 1 January, aims to make the process more transparent. Under the guidelines, all creditors will be provided with key information about the pre-pack, such as why it represented the best outcome for creditors, the assets involved in the transaction, and the identity of the purchaser.
Expert advice
With the number of hospitality businesses in administration set to rise, pre-packs will inevitably be a factor. Used properly, they can be a valuable tool, allowing administrators to act quickly and extract maximum value from struggling businesses. The main advantage for the business is that the negative press and disruption associated with administration is avoided.
With large groups, it is inevitable that some locations will perform better than others. Underperforming properties can become a drag on the group as a whole, with high rents, poor locations and low occupancy figures all contributing to a loss-making business. In theory, there could be an underlying strong, profitable business which would benefit from losing these "toxic" locations. A pre‑pack might be a viable way for administrators to extract that value, reduce the properties in the group to only the best‑performing and, ultimately, save the business. Further advantages are the retention of employees and, of course, the best possible return to creditors.
At the smaller end of the scale are businesses that have simply seen debts spiral out of control and have to look on as cash flow falls into a black hole. Again, a pre-pack could be the answer to rescuing the business and ensuring creditors get as much as possible back.
Balanced against the positives are the realities of any kind of insolvency process. Some creditors will lose out heavily, and relationships with suppliers must be considered carefully - their support for the new business may be fundamental to any successful rescue. For example, local suppliers may be heavily dependent on trade with the hotel sector and could be hit hard by a customer entering administration.
Check list
When considering a pre-pack deal, it is important to:
l Identify early whether insolvency is inevitable. Directors and business owners have specific duties in those circumstances, so take advice from a licensed insolvency practitioner or solicitor. Expert advice will be central to the success of any proposed deal.
l Consider the business carefully. Is the property part of a chain? Is location the reason the hotel or restaurant is underperforming?
l Talk to your suppliers. Keeping them in the dark will only result in a loss of trust, and they might be willing to assist by extending payment terms.
l If a pre-pack is decided on, use the fresh start to look at your business model and, again, seek advice. There is no point in starting a new business if you are going to be facing insolvency again in two years' time.
Beware!
Directors of businesses have a duty to ensure that the debts of the company can be paid as they fall due. If you have concerns about the solvency of your company and objectively cannot see "light at the end of the tunnel", seek immediate professional advice. Do not wait for service of a winding-up petition or court proceedings.
Contact
James Langford, solicitor, commercial dispute resolution team, Weightmans
0161-233 7467
james.langford@weightmans.com