Well, I learned something new today about the UK’s insolvency laws.
On Friday, a good proportion of the Amazon rain forest arrived in the form of two set of documents from some solicitors about our friends Direct Fruit Supplies (Leeds) Ltd.
From my brief skim read of these documents, it would appear that the Creditor Voluntary Arrangement has failed and adminstrators have been called in to ‘administer’ the business until it is sold. Here is a link to the London Gazette announcing the adminstration of Direct Fruit Supplies (Leeds) Ltd.
It appears that a buyer is on hand to buy the assets – read assets only of DFS (Leeds) Ltd and continue trading. I thought, how can this be, that the same people operating out of the same place can take over the same business but without taking on its liabilities – is this legal?
Oh yes indeedy, it is not only legal but it is called Pre-Pack Administration whereby the directors of an insolvent company start a new business which then buys the assets of the old failing business. Instead of putting additional resources into an already insolvent company the directors are able to use the same funds to set up a new company and acquire the assets of the old. The liabilities of the old business such as outstanding debts e.g. trade creditors and unfavourable lease agreements remain in the old company which is then liquidated. This practice is also known as phoenixing. Pre-pack administrations protect companies against creditors, selling them on debt free but can include employees and goodwill.
The name Pre-pack administration is because the administrator packages up the business assets and completes their sale before a creditors meeting is held. It is not necessary to involve the business’s creditors with this negotiation or gain their approval, therefore, the creditors do not have the opportunity to vote against the proposed asset sale. Rather looks like we and all the other trade creditors will receive nothing.