Imagine that your credit department phones one of your long-standing customers, whose idea of taking credit leans more towards taking liberties.
Their receptionist explains that the company went into administration this morning. However, the old management team has set up a new company incorporating the business and assets of the old company they have even bought the right to use the same name.
They value you as a supplier but, unfortunately, the debt was owed by the old company, not the new one, so regrettably that will not be paid. Still, they would like to open a new account with you. Welcome to the world of ‘pre-packs’.
This is where the administrator sells an insolvent company’s business and assets to a new company. Pre-packs, often set up by the same people after administrators are appointed, are becoming more common.
Creditors are not given any advance warning of the administration or sale, and cannot influence the purchase price.
But they may not have to grin and bear it. Pre-packs are coming under increasing scrutiny as the economy worsens. The insolvency practitioners’ professional body, R3, is forcing insolvency practitioners to justify pre-packing to creditors rather than selling the company to the highest bidder.
Insolvency practitioners do not want personal liability for trading while buyers are sought for a company with limited funds.
But suppliers are starting to fight back by starting to think like banks. While insolvencies are inevitable in business, suppliers increasingly feel debtors should not pre-pack insolvent businesses without warning. Financial pressure builds up over months or years.
A downturn might accelerate the speed, but company owners should still know what is happening to their finances. They should not keep suppliers in the dark as their situation worsens.
An issue of trust
Nick Tiltman, credit director at Computer 2000, says it is an issue of trust and the value of the relationship. If a company is in difficulty, it should at least approach its major creditors to try to sort things out.
Most sensible suppliers would accept a voluntary arrangement where a company settles its debts by offering, say, 50p in the £1 over three years, says Tiltman.
That leaves the company with a future and something for the suppliers.
That is the responsible thing to do, and if the business has addressed its financial problems, most creditors will be prepared to give them their support.
“If the company goes into administration, buys the business and assets back from the administrator and starts up again without addressing the underlying issues, they can’t expect automatic support from the old suppliers,” says Tiltman.
Nitin Joshi, founder of business advisory service ChannelMoney, says that if the supplier loses out when the company is pre-packed without any warning and the new company approaches for an account, at the very least a personal guarantee or security for a large slice of the unpaid sum should be asked for before agreeing to supply them again.
Supply not guaranteed
If ChannelMoney worked with the company but the latter still fails, there is a lot more sympathy, and better terms may be offered to the new company. It may be a competitive market, but that does not mean that supply is guaranteed.
What else can suppliers do? First, make sure you are getting regular, accurate management information. Make it a term of continued supply that this is provided at least monthly. Watch out for companies taking longer and longer to pay their bills.
Second, make sure your retention of title terms work not only on paper but in practice. You must be able to identify your supplies in the warehouse and tie them to the relevant invoices.
Also, you should get personal guarantees, or even security, if you plan to keep supplying them. You have no obligation to supply a pre-packed business just because you supplied the old one. Even if you decide to do so, you do not have to supply on the same terms.
Why can the new company not pay some or all of the old company’s debt to you? Prevention, as ever, is better than cure.
Christopher Harlowe is a partner in the insolvency and commercial dispute resolution team at legal firm Speechly Bircham
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