3 Pre Pack Administration Disadvantages Each Insolvent Company Must Know

A pre pack administration is relatively new in comparison to other insolvency processes. But the insolvency process enables companies to continue trading, reduce overall debt burden, and retain employees, supplier and customers. Once the pre pack administration starts, the insolvency practitioner can sell the company’s assets and business to both third party buyers and directors. The amount realized by selling the company’s assets or business will be divided among its creditors. However, the directors of the company must understand some of the important disadvantages of this insolvency process.

Major Disadvantages of the Pre Pack Administration

  • A limited company can use pre pack administration to continue trading while reducing its overall debt burden. But each insolvent company is required to meet certain prerequisites to use the insolvency process. The directors of the company along with the insolvency practitioner must show that the option will benefit the creditors.
  • The pre pack administration allows the directors of the insolvency company to buy the assets or business from the insolvency practitioner. But the insolvency practitioner will try to sell the assets at their fair market value to safeguard the interest of creditors. Further, the directors can buy the assets only out of their personal funds. So the directors may require more time to raise the funds required for buying back the old company’s business or assets.
  • The insolvent company can retain its existing employees by moving them to the phoenix company. But it will be required to retain the existing employees without altering their employment terms. So the pre pack administration will not help the new company in curtailing operational cost by reducing staff wages. Also, the company may find it challenging to attract new employees.
  • To continue trading, the directors of the company must retain its existing suppliers. But the pre pack administration will have a negative impact on the suppliers. So the company has to renegotiate terms and renew contracts to retain the existing suppliers. The adjustment may compel the company to incur additional expenses.

On the whole, the pre pack administration must be carried out diligently to help the insolvent company in continuing trading smoothly. The directors of the company, however, must avail professional advice to ensure that the assets are being sold at their fair market prices. The professional will further help the directors in understanding the best way to reap the benefits of this insolvency process.

Understanding the Limitations of a Company Voluntary Arrangement

As a legally binding agreement, a Company Voluntary Arrangement (CVA) enables a limited company to repay its debts over a fixed period of time. A company can also reap several benefits by applying for CVA. In addition to avoiding liquidation and improving cash flow position, a company can further apply for CVA to get legal protection from creditors and continue trading. However, a CVA can also have a negative impact on the limited company. So the directors of the limited company must understand the major disadvantages of CVA before applying for the process.

Disadvantages of Starting a Company Voluntary Arrangement Process

Negative Impact on the Company’s Credit Rating: CVA enables an insolvent company to continue trading. But the credit rating of the limited company is affected negatively once the CVA process is implemented. So it becomes difficult for the company to borrow additional funds and get credit from suppliers. The company must have adequate cash to pay the suppliers and expenses.

Difficulty in Starting New Contracts: To improve its cash flow position, the limited company has to bid for new projects and renew contracts with customers. But each potential client will carry out a detailed credit check against the business before signing any contract. Thus, CVA will also have a negative impact on the company’s growth prospects.

Sacrifice Profits: A CVA makes it easier for the limited company to repay debts over a fixed period of time. So the company has to sacrifice a large part of its profits towards debt payment. If the company becomes more profitable, it has to pay additional funds to the creditors through the insolvency practitioner. The CVA will not allow the company to reinvest a part of its profits to get more revenues.

Inflexible: A CVA is more inflexible than other insolvency processes. Once the CVA process is implemented, the company has to adhere to strict and predetermined payment terms. No changes can make to the payment schedule or terms without the agreement of the creditors. In case, the company’s revenues and profits fall, it will not be able to make payment to the creditors through the insolvency practitioner. The failure of CVA can always result in the winding up of the company.

The insolvency practitioner is prohibited to give any advice or suggestions to the directors. So the directors need additional consultancy service to protect their personal interest. They also need expert advice to effectuate the CVA process and earn revenues. Insolvency&Law has already helped the directors of several limited companies to protect their interest by managing the Company Voluntary Arrangement process more effectively.

Statutory demand time Limits .

Statutory demand! I’m running out of time.

Borrowed money? Yes. Paid it back? No. Sooner or later, you might receive is a statutory demand. A statutory demand is a legal request for the payment of a debt. As soon as this arrives at your doorstep, a silent clock starts ticking and it is important that you know all the statutory timelines and the consequences that would arise if they are not met. Hence you will need to act quickly and carefully in response to the statutory demand.

The receipt of a statutory demand gives you a 21 day deadline from the date of receipt to respond to the demand and to pay what you owe or state your case. It is within this time frame in which you will be required to either make payment or payment proposals.

To meet this requirement, you would have the following options; firstly, you could pay the debt. Of course that is much easier said than done. Alternatively, it would be possible to reach an agreement with your creditors on reduced timely payments. In the event that this fails to be a feasible route, it wold also be advisable to take out a debt consolidation to honour the statutory demand.

In the event that you are in disagreement with either the debt itself or with part or all of the information that your creditor has listed on the statutory demand, then you can start a dispute to have the demand set aside. You will need to do this within 18 days from the date of receipt of the demand.

For a successful dispute against a statutory demand, there are reasons that are considered valid. Among them are; the amount being claimed is less than the minimal requirement upon which a statutory demand is supposed to be based on. Secondly, you too have a claim against the same creditor. Thirdly, the debt is a secured debt or fourth, the claim upon which the statutory demand is in dispute.

Not responding to a statutory demand is a complete no-no! One should act in either one way or another. Ignorance of not only a statutory demand but also the time limits on it may have dire consequences. A hearing 2-3 months from the date of receipt of the statutory demand will be held in the event that the time limit upon you has expired and there has been no application to set it aside.

Just the mere issuance of a statutory demand might not be detrimental, however the ignorance of it could lead to bankruptcy or the winding up your company by the court. In the evident that you have the right evidence and documentation to challenge the payment, it would be pertinent to ensure that any and all documents are completed and filed correctly. The court will dismiss the statutory demand in the event that an application for a demand to be set aside or for an injunction is successful. The creditor will be then be responsible for the full costs of the hearing.



Coming soon Insolvency And Law Company Review.

A Review of London based Insolvency and Law .Featuring consultant Peter Murray  who specialises in issuing winding up petition amongst other Insolvency services.