A Pre-pack administration is a legal and effective way to rescue a business that is insolvent. Whilst it’s a less common form of insolvency solution in the UK today, it is still the best option for some.
Here’s what you need to know to start understanding the pre-pack administration route:
The definition of a pre-pack
A pre-packaged administration, or ‘pre-pack’ as it’s often called, is a type of company rescue procedure for businesses with significant unpaid debts.
It allows an insolvent business to make preparations to legally sell its business and assets to a buyer before the appointment of administrators, with the sale actually being completed immediately following the administrators appointment.
The transfer of the business happens quickly and seamlessly and so is often able to preserve important contracts, the brand and value of a business and save jobs, with the employees often being transferred to the new company.
Only a licensed insolvency practitioner can act as Administrator of the company.
To outsiders, such as suppliers, pre-packs can sometimes give the appearance that a company ‘went bust on Friday and reopened on Monday’. Especially if the ‘buyer’ is the existing management team operating under a new company (as is often the case).
What is the pre-pack process?
The pre-pack administration process typically involves the following steps:
- Seeking professional advice: The company should utilise licensed insolvency practitioners to determine whether a pre-pack is the right course of action.
- Appointment of an administrator: There are both out of court and court based procedures to appoint an administrator. The appointment can be made by the directors or shareholders of the company, a bank with a qualifying charge or the company’s creditors.
- Sale of assets: The administrator may approach existing management, directors, or other interested parties to negotiate prices and set terms of sale. The purchaser is encouraged to obtain an independent opinion report on the proposed sale from a pre-pack evaluator.
- Completion of the sale: The administrator will complete the sale, with the buyer typically setting up a new company to purchase the company’s business and assets.
- Administrator sends proposals to creditors: The administrator must send a detailed proposal to creditors explaining and justifying the benefit of the pre-pack sale to creditors
- Distribution of proceeds: The administrator will use the proceeds from the sale to discharge the costs of the administration procedure, then makes payments to the relevant categories of the company’s creditors.
- Termination: Once the sale is complete and the proceeds have been distributed, the company will exit from administration and the relevant solution will be implemented depending on the exact situation at hand.
Pre-packs are flexible in terms of how they can work, and very much company specific. Seeking the right advice from an insolvency practitioner is crucial.
Who can buy the business and assets in a pre-pack?
There are several parties that can purchase assets of an insolvent company in this process, including:
- The existing directors or management team
- A third party that is not connected to the business, such as a competitor
The most suitable purchaser for the business will depend upon a number of factors, including who is willing to pay the best price and under what terms (upfront payment or deferred payment) whether the offer is for the whole or part of the business, and whether there is reasonable confidence in the new management team being able to successfully continue the business after the sale.
In some cases, creditors may challenge the sale of the business, particularly if they believe that the sale was conducted unfairly and that the deal does not represent best value for creditors.
What are the benefits and disadvantages?
There are several pros and cons of a pre-pack administration
The pros:
- Preservation of business brand and value
- Maintenance of ongoing customer contracts
- Potentially quicker than other insolvency procedures, such as liquidation
- Potential protection of jobs (by enabling the business to continue operating under new ownership)
- Directors can remain in control of the business, in some cases
- Certainty, as the sale of the business assets is negotiated and agreed upon before the administration process begins
- Reduce the losses suffered by creditors, as the sale of the business assets may generate better realisations, meaning more funds to pay creditors
- Flexibility, as the process can be tailored to the specific needs of the business
The cons:
- Viewed as a somewhat controversial insolvency procedure, due to the sale being completed prior to creditors generally becoming aware of it and being able to scrutinize the sale
- Potentially damaged trust with trade creditors, such as suppliers and customers
- Employee job cuts may be required
The most common reasons for a pre-pack
There is no single most common reason for a pre-pack administration in the UK, as companies can enter into pre-packs for various reasons.
Some of the common reasons why a company might choose to enter into a pre-pack administration include:
- Financial difficulties: such as cash flow problems or high levels of debt
- Change in ownership: pre-packs can be a way to restructure operations and facilitate a sale to a new owner
- Market changes: companies facing significant changes in their market or industry may use a pre-pack administration as a way to adapt their operations and position themselves for future success
Talk to us about pre-pack administration
If you or your client’s company is in financial distress, seeking help early ensures you have the greatest number of options available to you.
Talk to our friendly team today and receive sound advice on your next steps.