Pre-pack helps investors

How a secured creditor successfully ended his investment in an insolvent house design company.

The situation

The designer and developer of an innovative building system - in essence a prefabricated house - was having difficulties securing second stage funding. Money was needed to build a prototype ready for a production line. While the company had identified interested parties, it was increasingly clear no funding would be available. As a result, the company's secured creditor began to have serious concerns, including over some of the directors' activities. A winding-up petition had already been issued. Not knowing what to do, the secured creditor instructed Ruth Duncan, partner in charge of Atherton Bailey's Maidstone office.

What we did

Ruth met with the creditor and directors. After reviewing the company's financial status she confirmed it was insolvent and could not continue to trade. There were also issues any incoming insolvency practitioner would need to tackle. The most pressing of these was salvaging and realising the business assets. There was also uncertainty about deposits for orders from the Grand Designs Exhibition and a competition in The Times.

The winding-up petition meant the company's bank account would shortly be frozen and the business would then be unable to continue. As a result, Ruth suggested a pre-pack administration and the sale of the business's goodwill, intellectual property rights and exhibition house to a new venture. The speed of the sale was vital to protect the value of the assets.

The result

As a result of the sale, the secured creditor was repaid 83 per cent of his investment. The trust claims on the deposits were reviewed, but not upheld as they had become mixed with the company's ordinary funds which was bad news for deposit holders as the funds remained in the general pot for creditors. The company was subsequently placed into liquidation so the Official Receiver could investigate directors' activities - including their failure to properly account for deposits.