Many businesses across the world are struggling to come to terms with the economic damage wreaked by Covid-19. In some cases, businesses are being forced to make the difficult decision of whether to remain open, or whether to close and start insolvency proceedings. Whilst Guernsey's response to the pandemic has been admirable, Director of Recovery & Reorganisation at Grant Thornton Channel Islands, Ben Rhodes, is still expecting a wave of economic pain to hit the island. With many business owners facing an uncertain future, Ben explains how a 'prepack' can help protect jobs and allow businesses to operate.
What are prepacks?
With many businesses facing furloughs, redundancies and cutbacks, many Directors are apprehensively looking at the options available to keep businesses operating. A pre-packaged sale of business via liquidation or administration, known as a 'prepack', could offer a solution.
Prepacks have been commonplace in the UK for many years. A prepack describes a scenario where the sale of a business and its assets is agreed immediately prior to the company entering a formal insolvency procedure e.g. liquidation, and the liquidator will then complete the sale. The business operations can continue, jobs can be retained and the new business will be free from the debt of the old company.
The purchasers in a prepack sale are often associated with the original company, for example the original owners or management. A prepack could also allow business owners to effectively purchase the business and assets of their company through a formal insolvency process, and to mothball the business whilst they wait out the current economic uncertainty.
Our team at Grant Thornton was the first to introduce a prepack sale of business to Guernsey in 2014 and we have since concluded numerous locally. We are leaders in providing prepacks and a range of restructuring solutions as part of our recovery and reorganisation services in the Channel Islands.
Prepacks can suit a variety of businesses but are particularly suited to those providing essential services, where continued operations are paramount. For example, we've helped a company locally whose operations were in running care homes - a prepack solution enabled their business to continue uninterrupted with the teams remaining employed and the residents receiving essential care.
In recent months, financial support from the States of Guernsey has helped many local businesses to continue to trade. However, if and when financial support is reduced or withdrawn, I fear many businesses may feel the delayed economic impact of the pandemic.
Both large and small businesses operators will, through no fault of their own, suffer and face difficult decisions in the coming months. In some cases, insolvency proceedings will be inevitable. However, keeping businesses operating and islanders employed must be ensured where possible.
A resolution for all
Prepacks not only benefit business owners and employees, but also creditors. The process allows the business and assets to be sold quickly and if used properly should protect and maximise the value. The process should also minimise creditor claims such as claims of employees, whose employment should be retained; customers who might otherwise have claims for unfulfilled contracts; and landlords who benefit from having a paying tenant remaining in the premises. The combination of these factors can maximise returns to remaining creditors when compared to a more typical sale of business and assets through liquidation.
Prepacks are commonly used in the UK and we are helping more and more businesses in Guernsey pursue this option. There is no doubt that Covid-19 disruption will continue to impact the island's economy; and in the right circumstances, prepacks might provide an effective way for struggling businesses to weather the economic storm.