Case Study: Prepack administration of Greater Manchester Chamber of Commerce to preserve business continuity and save jobs

Greater Manchester Chamber of Commerce (GMCC), one of the largest chambers of commerce in the country with more than 4,000 members, was a company limited by guarantee and operated as a not-for-profit organisation.

Accredited by the British Chamber of Commerce and was FCA regulated, GMCC supported regional businesses in a variety of ways, including the provision of international trade services and issuing Carnets - “passports” for goods temporarily moving between countries, for example, exhibiting a UK-manufactured vehicle at an overseas trade fair.

Causes of GMCC’s financial difficulties

GMCC leased premises in Manchester city centre and expanded shortly before the Covid-19 pandemic to meet rising demand for conferencing and meeting space. However, post-pandemic, demand dropped, and the space was no longer required, leaving GMCC unable to pay the ongoing rent and associated property costs. The management team believed GMCC could be a viable business if it operated from smaller, less expensive premises and sought to reach a consensual agreement with the landlord, but negotiations failed. Consequently, the chamber was unable to secure further funding to continue its operations beyond the short term.

Furthermore, GMCC had an insolvent balance sheet. Significant creditors were a pension scheme liability as GMCC was a statutory employer of a closed defined benefit pension scheme (“the Scheme”) and also the landlord.

Facing imminent cash flow difficulties, the directors approached Armstrong Watson for advice.

How we helped

Armstrong Watson’s Restructuring and Insolvency team were initially instructed to prepare a report on the options available. Given GMCC could trade profitably without the burden of the existing lease, we recommended that in the first instance, a financial offer be made to the landlord in return for a voluntary surrender of the lease. This option would see the GMCC moving to less expensive premises, the landlord receiving a lump sum payment in return for a surrender of the lease, and an insolvency process being avoided.

However, an affordable solution could not be agreed, and therefore, a solvent solution was not possible. In light of this, Armstrong Watson advised the directors that steps should be taken to place GMCC into administration as a rescue of the GMCC business by way of a prepack administration would preserve the value in the business, ensure business continuity and services to members were maintained as far as possible, and that as many jobs as possible were saved.

Given the niche nature of the GMCC’s business, its various accreditations, the FCA registration and the pension scheme, it was necessary for a detailed planning process to be undertaken prior to administrators being appointed.

Protection from enforcement action

Due to the potential threat of enforcement action from creditors, it was important that a Notice of Intention (NoI) to Appoint Administrators was filed at Court by the directors of GMCC. The moratorium from enforcement action granted by the filing of NoIs gave Armstrong Watson and legal advisers sufficient time to carry out detailed planning for the administration and pre-packaged sale, and for the proposed purchaser of the business and their advisers to engage with all the key stakeholders, since their support was vital in order for them to take the business forward in a new entity.

Key factors in the administration planning process

• FCA

  In any FCA-regulated business, it is essential that there is engagement with the FCA as early as possible, and that consent of the FCA is obtained prior to filing a NoI. Armstrong Watson ensured the FCA was contracted, advised of the proposed strategy and obtained consent to the filing of the NoI.

• Carnets

  Only accredited chambers can issue Carnets, and the issuing of Carnets is controlled by the UK National ATA Carnet Organisation (UKNATCO). We entered into discussions with UKNATACO at the early stages of planning. As part of the Carnet process, it was necessary for GMCC to take a deposit as security when issuing the Carnets, as they are liable for any charges incurred if a Carnet holder breaches any customs regulations in the different jurisdictions. The deposits were in the form of cash, insurance policies or bank guarantees. At the date of the administration, there were about 650 Carnets in issue, which have a three-year lifespan.

  Any purchaser of the business would need to be a Chamber of Commerce in order to issue Carnets and therefore accredited by the British Chamber of Commerce. UKNATACO also needed to be comfortable with any purchaser, as they are the ultimate guarantor for Carnets. Any purchaser would also need to be capable of taking a novation of the insurance polices and bank guarantees relating to the existing Carnets and acceptable to all providers of the security.

• Membership

  GMCC had more than 4,000 members who paid an annual subscription, with some who paid annually in advance, some who paid monthly, and some who were in arrears. The provision of member services by any purchaser would need to be as seamless as possible.

  It was necessary to ensure that appropriate communications were issued to all members at the earliest opportunity so confidence was not lost.

• Assets

  GMCC assets comprised of fixtures and fittings and IT equipment, debtors and various domain names and trademarks.

  It also owned a freehold property, which was leased to a connected party who had sublet the property to various tenants.

  The proposed administrators needed to understand the nature of the lease and the related tenancies, to determine how best this property could be disposed of. It was also necessary to understand the VAT status of the property, and advice from Armstrong Watson’s VAT specialists was sought.

  Valuations of all of the assets were obtained from independent, suitably-qualified agents.

• Defined benefit pension scheme

  Had there been a formal insolvency whilst the GMCC was a statutory employer of the pension scheme, an S75 liability in the region of £7m would have crystallised, and the scheme may have entered into the Pension Protection Fund. The timing of any insolvency was therefore critical.

  The directors of GMCC took independent expert pension advice, and an agreement was reached prior to the appointment of the Administrators, whereby GMCC was replaced as a statutory employer by another employer with the requisite financial strength to be the principal statutory employer, and the purchaser became a joint statutory employer.

• Secured creditor

  GMCC’s banker was a secured creditor. A secured creditor has the ability to appoint an administrator. This may occur in instances where they are not happy with the directors’ choice of administrator and/or the proposed administration strategy. Our team engaged with the bank at the outset and advised of the strategy to ensure any concerns or queries could be addressed.

• Purchaser

  As outlined above, only another Chamber of Commerce could purchase the existing business as a going concern, meaning the pool of potential interested parties was extremely limited.

  Following various discussions between the directors, Armstrong Watson and the British Chamber of Commerce, a new chamber company, which included the existing management team, was set up, and an offer was made by the entity to purchase the business and certain assets of GMCC via a prepack sale. The freehold property was excluded from this offer.

  This offer was recommended by the appointed agents. As the proposed purchaser was a connected party by virtue of common directors, we advised that it was necessary for them to obtain an independent Evaluator’s Report, the purpose of which is to inform creditors whether or not the proposed consideration and grounds for the sale are reasonable.

• Press and communications

  This was a high-profile administration in the Greater Manchester area with the potential for miscommunication without adequate planning. It was therefore important that press releases were prepared in advance. Our marketing team worked jointly with the purchaser’s press team to ensure local media accurately presented the facts within their news coverage and that concerns of members were allayed as far as possible.

Results

Restructuring and Insolvency Partner Lindsay Cooper, who led the Armstrong Watson team, said: “This case is a great example of the importance of spending time pre-appointment to really understand the complex nature of the business and to engage with all interested parties to achieve the most advantageous outcome.”

As a result of this:

• The secured creditor has been repaid in full.
• Preferential creditors are likely to be repaid in full
• All but one of the employees have transferred to the purchaser
• Liabilities have been minimised as the GMCC was removed as a statutory employer of the pension scheme prior to the administration
• The Carnet securities have been successfully novated to the purchaser
• Members have experienced a near seamless transition to the new chamber, allowing them to continue to benefit from the vital advice and support offered by the new chamber.

The freehold property was successfully sold at auction two months after the administration, exceeding auction estimates.

Clive Memmott, Chief Executive Greater Manchester, Chamber of Commerce said: “This was a complex transaction for a number of reasons and needed patience and understanding from everyone involved but it also needed the constructive challenge that you provided to ensure that realistic decisions were made as we encountered a series of obstacles and delays because of the complexities we encountered and had to deal with.

“In the pre-appointment period, the role of the insolvency adviser changes as the process goes through different phases along the journey into administration. It is imperative that your advisers explain this very clearly and provide unambiguous guidance on what is required from you and your colleagues to hit a tight timetable with little room for error. Although it was a very intense and demanding period, I cannot underestimate the importance of your key advisers striking the right balance of calm, clarity, and urgency – Lindsey and Ann provided this throughout the entire process.

“My sincere thanks and regards.”