Parent Company gone bust.

[Countdown]

Two of our clients are subsidiaries of a subsidiary of a Company that has gone into administration.

I have been informed that both clients are trading "profitably" and there are no going concern issues. However I can't get my head around what the Administrators of the Grandparent company might do in this situation. Could they wind up their subsidiaries? Or transfer their cash to pay off the parent Company's debts? I assume they would try to sell them as a going concern. They owe us a few £00k between them so I might need to make a bad debt provision


Hope the above makes sense. Any suggestions/comments appreciated?

[David_M]

Countdown said:

Two of our clients are subsidiaries of a subsidiary of a Company that has gone into administration.

I have been informed that both clients are trading "profitably" and there are no going concern issues. However I can't get my head around what the Administrators of the Grandparent company might do in this situation. Could they wind up their subsidiaries? Or transfer their cash to pay off the parent Company's debts? I assume they would try to sell them as a going concern. They owe us a few £00k between them so I might need to make a bad debt provision


Hope the above makes sense. Any suggestions/comments appreciated?

If they are trading OK then their value for sale as going concern should be the best value for the Administrators so that is what they will try to do. This does depend on someone wanting them, but assuming that they are not in some impossible niche there is probably someone out there that wants them.

Doesn't mean that you shouldn't try to get your money out of them - the small issue being that everyone else might be thinking the same.

If the ultimate parent has gone bust, then they have probably long ago moved as much cash as possible to the top of the corporate tree.

[Countdown]

David_M said:

If they are trading OK then their value for sale as going concern should be the best value for the Administrators so that is what they will try to do. This does depend on someone wanting them, but assuming that they are not in some impossible niche there is probably someone out there that wants them.

Doesn't mean that you shouldn't try to get your money out of them - the small issue being that everyone else might be thinking the same.

If the ultimate parent has gone bust, then they have probably long ago moved as much cash as possible to the top of the corporate tree.

Thanks - that all makes sense.

I think the ultimate parent is in administration rather than having gone bust. I need to find out the full story really. We've had to make a £1m bad debt writeoff for last year, I don't really want to add to that.

[2 sMoKiN bArReLs]

Countdown said:

We've had to make a £1m bad debt writeoff for last year,

Holy moly on a scooter!

[bristolbaron]

Countdown said:

Two of our clients are subsidiaries of a subsidiary of a Company that has gone into administration.

I have been informed that both clients are trading "profitably" and there are no going concern issues. However I can't get my head around what the Administrators of the Grandparent company might do in this situation. Could they wind up their subsidiaries? Or transfer their cash to pay off the parent Company's debts? I assume they would try to sell them as a going concern. They owe us a few £00k between them so I might need to make a bad debt provision


Hope the above makes sense. Any suggestions/comments appreciated?

Is there any benefit to considering buying out the clients?

[Countdown]

bristolbaron said:

Is there any benefit to considering buying out the clients?

I can't see any. They work in a completely different sector. We also don't know what their books look like and we're a bit strapped for cash ourselves. There is zero appetite for taking on more risk. We're into a period of retrenchment and trying to rebuild the balance sheet.

[sleepezy]

This is quite common - much more so than you'd realise, particularly with larger companies or those with opco/propco structures.

Countdown said:

However I can't get my head around what the Administrators of the Grandparent company might do in this situation.

Administrators are required to seek the best outcome for the creditors of the company in admin - it sounds as though that is likely to be achieved by continuing to trade the subsids for a short period while they market the companies for sale as a going concern. The best outcome for the creditors of the company in admin being the cash generated from the sale of the subsids.

Countdown said:

Could they wind up their subsidiaries?

Possible but from what you've said why would they? The most immediate risk is if they are group VAT registered with a large o/s VAT balance (as that provides for a joint and several liability with both topco and subsids so HMRC could force the insol of subsid).

Countdown said:

Or transfer their cash to pay off the parent Company's debts?

Not in preference for other debts, such as yours, but be careful if they have any secured debt - at least an administrator isn't going to be doing anything dodgy

Countdown said:

I assume they would try to sell them as a going concern. They owe us a few £00k between them so I might need to make a bad debt provision

At the moment, from what you say, there's no need for a provision - the companies you're trading with are solvent, profitable and presumably cash positive. That's not to say I wouldn't be managing the position.

Look at the administrators proposals - it should give you an indication of their intentions. I have just been appointed by an administrator to look after a couple of subsidiary companies in a very similar scenario (the companies I am appointed over are property development JVs so slightly different but in our case the creditors of the company in admin are best served by completing the developments to maximise the value). There's nothing in what you've posted so far that would give me massive cause for concern.

[Alpinestars]

You don’t need a bad debt provision unless the companies that owe you money are themselves insolvent - not the case from what you state. But see below.

If the companies are not insolvent, the parent (Administrators) could wind up the subs (solvent liquidation), but;

A) why would they?
B) the subs would need to pay all their debts off before liquidation. Including amounts owed to you, so the solvent liquidation would be somewhat irrelevant.

The most likely scenarios seem to be;

A) sale of the subs to realise cash to pay creditors of the parent, or
B) a trading administration if parent is still trading, possibly bringing it back to solvency.

Do subs owe money to the parent? In which case the administrator will chase these debts. And whether they are paid in preference to your debt will depend on whether subs have guaranteed any parent debts.

Are subs owed money by parent? In which case this might not be recoverable and subs will need to make a provision against the debts, which could make them insolvent! If the subs become insolvent, whether and how much you get paid will depend on what other debts they have, and the ranking of those debts, eg, secured debt and some taxes rank ahead of your debt.

[Countdown]

Thanks Sleepezy and Alpinestars

What's worrying me is that there appear to be a lot of intercompany borrowings and loans. The shares in the subsidiary appear to have been sold to ANOTHER company and all the Directors have been replaced by new Directors. However, according to LinkedIn the new Directors appear to be connected to the OLD ParentCo Directors. It's like a house of cards.

Basically it looks like the GrandParentCompany wanted to transfer its interest in the GranbdChild-Subsidiary off it's books so that the Grandparent's administrators cant get their claws on it.

Sorry - its very complicated. I'll be making a bad debt provision as I have a sneaky feeling our Client will be folding quite soon.

[Alpinestars]

An administrator can reverse transactions like that. Insolvency law gives them wide ranging powers. Your main issue is probably going to be if the subs owe money to the parent or they are guarantors of parent debt.

[2 sMoKiN bArReLs]

Alpinestars said:

An administrator can reverse transactions like that. Insolvency law gives them wide ranging powers. Your main issue is probably going to be if the subs owe money to the parent or they are guarantors of parent debt.

Administrators only do what suits the administrators best. I've been closely involve with several insolvencies & I am amazed at some of the shenanigans I've witnessed.

[Countdown]

Alpinestars said:

An administrator can reverse transactions like that. Insolvency law gives them wide ranging powers. Your main issue is probably going to be if the subs owe money to the parent or they are guarantors of parent debt.

I'm not sure if it's clear from my posts above - it's the Grandparent Company that has called in the administrators. The immediate subsidiary appears to be fine. However our contract is with the Subsidiary of the Subsidiary i.e. TWO levels down.

There is a huge web of companies. They all seem to work in Real Estate and there are lots of interconnected borrowings/loans and lots of the same people acting as Directors for different companies. It appears that every time they have started a new development they have created a new Company (which I suppose makes sense from a Limited Liability point of view). Anyway hopefully I'm being over-paranoid.

[sleepezy]

Countdown said:

It appears that every time they have started a new development they have created a new Company

Also very common, although more usually to protect the parent co in case the subsidiary struggles!

[Alpinestars]

Countdown said:

I'm not sure if it's clear from my posts above - it's the Grandparent Company that has called in the administrators. The immediate subsidiary appears to be fine. However our contract is with the Subsidiary of the Subsidiary i.e. TWO levels down.

There is a huge web of companies. They all seem to work in Real Estate and there are lots of interconnected borrowings/loans and lots of the same people acting as Directors for different companies. It appears that every time they have started a new development they have created a new Company (which I suppose makes sense from a Limited Liability point of view). Anyway hopefully I'm being over-paranoid.

Yep, I got that first time round. Newco for a propco group is not unusual. Often an SPV for each property. Security/lending/exit reasons. All my points stand. The key one might be interco debt position with the grandfather and/or guarantees.

[Countdown]

Alpinestars said:

Yep, I got that first time round. Newco for a propco group is not unusual. Often an SPV for each property. Security/lending/exit reasons. All my points stand. The key one might be interco debt position with the grandfather and/or guarantees.

They have a significant negative P&L reserve but they have several £000k in "Other reserves" (not Share capital). I assume that's Director loans or something?

[Alpinestars]

Countdown said:

Alpinestars said:

Yep, I got that first time round. Newco for a propco group is not unusual. Often an SPV for each property. Security/lending/exit reasons. All my points stand. The key one might be interco debt position with the grandfather and/or guarantees.

They have a significant negative P&L reserve but they have several £000k in "Other reserves" (not Share capital). I assume that's Director loans or something?

Reserves are not that relevant. You’re an ACA from memory? Look at the creditor and debtor position. And guarantee position. That should tell you a lot.

[Countdown]

Alpinestars said:

Reserves are not that relevant. You’re an ACA from memory? Look at the creditor and debtor position. And guarantee position. That should tell you a lot.

They've got negative assets at the moment due to accumulated losses b/fws. However they've got a significant cash balance (which I think is either a Director Loan or an Intercompany loan). Unfortunately they're filing shortened accounts (just a Balance Sheet) so i can't tell what this relates to.