Prepack insolvency – the accountancy firm network – a case study from James Hopkirk

Buy-and-build strategies can create significant value for private equity investors and the businesses in which they invest. But when liabilities arise in one part of the group, the consequences can threaten businesses across the whole group.

Earlier this year, James Hopkirk, our Restructuring Partner was instructed by the investors of an accountancy group. This case study shows how a carefully structured pre-pack administration can protect the viability of the wider group while managing complex obligations to creditors, clients, and regulators.

This accountancy practice with eight, created through a ‘buy and build’ approach, with offices continuing to operate largely independently, with limited integration beyond some shared central services.

Combined turnover across the offices was approximately £2.5 million.

One office had provided tax planning advice to landlords involving ownership structures designed to reduce tax liabilities. HMRC reviewed these arrangements and determined that the structures were ineffective, writing to the relevant clients to recover unpaid tax. Initial estimates put the potential claims in the range of several million pounds, with subsequent information suggesting the total exposure could be considerably higher.

New investors had acquired the group and sought to understand how the claims could be addressed. With the company unable to settle the liabilities without ongoing investor support, Kreston Reeves’ restructuring team was engaged.

The approach

The existing investor indicated an interest in acquiring the business and assets of the seven unaffected offices, excluding the office which had originated the defective advice. Valuation agents were engaged, and it was concluded that a sale conducted in conjunction with a formal administration process would generate the best possible return for creditors. Had the business ceased trading entirely, the likely return to creditors was expected to be minimal.

An accelerated marketing campaign was undertaken to establish whether other parties might bid for the business. In the event, a purchaser funded by the existing investor submitted the highest offer by a significant margin.

The outcome

The sale was completed immediately upon the appointment of the administrators. The transaction was carefully co-ordinated by James Hopkirk and the Kreston Reeves team across several areas: 

• Staff across the seven continuing offices were transferred to the purchaser 

• The accountancy regulators were kept informed and were satisfied with the transaction 

• The purchaser was granted a licence to occupy the trading sites, allowing time to negotiate new leases or arrange a managed exit where needed 

• Clients of the seven continuing offices were transferred to the purchaser and continued to be served without disruption 

• Clients of the closed office were written to with a clear explanation of the position, and a framework was put in place to support an orderly transfer of their files to alternative advisers 

• Kreston Reeves worked to establish the status of client claims and insurance notifications, enabling clear and prompt communication with those most directly affected

James Hopkirk, Restructuring Partner, said:

“This was a complex situation involving regulatory considerations, significant potential liabilities, and the livelihoods of staff and clients across multiple offices.

“By moving quickly and structuring the sale carefully, we were able to preserve the majority of the business and protect jobs, while ensuring that those clients affected by the office closure had a clear path to alternative support. 

“It is a good example of how the administration process, used well, can deliver far better outcomes than a disorderly wind-down.”

Impact

The pre-pack administration preserved the majority of the accountancy firm’s group business and workforce, maximised recoveries for creditors, and put in place appropriate frameworks to manage the complexities arising from the closed office with minimum disruption to stakeholders.

If your business is facing financial or operational challenges, or you would like advice on protecting value for stakeholders, our restructuring specialists can help. Get in touch with a member of our team to discuss your circumstances.