A Pre-pack administration, or ‘pre-pack’ as it’s often called, is a legal and effective rescue procedure for businesses with significant unpaid debts.
There are several reasons why this insolvency route would be beneficial to a company, but in other circumstances it may not be the best route. The only way to know this, of course, is to get in touch with an insolvency practitioner to discuss the options available.
In this post we’re going to explore who is affected by a pre-pack administration. So if you’re looking to understand the process first, make sure you read our last blog before you get started.
How does a pre-pack impact directors?
Typically, the directors are the people to have instigated a pre-pack after consulting with a licensed insolvency practitioner. This can affect them positively in three ways:
- Directors may be able to keep control of the day-to-day business (depending on the exact scenario)
- They can choose their own administrator
- The business can continue to trade whilst the sale goes through, meaning less disruption
However, directors also have some key responsibilities in ensuring the process runs smoothly. They:
- Must provide full details of the assets and liabilities of the company to the insolvency practitioner
- Must ensure that employee details are provided so employment legislation can be complied with
- Must provide a full background history of the company
This gives the insolvency practitioner (and any other professionals) involved a full understanding of how the business has got to the point of requiring a pre-pack.
How can creditors be affected by a pre-pack administration?
Like most insolvency scenarios, a pre-pack is essentially an involuntary process for creditors.
However, depending on the outcomes of the pre-pack and nature of the creditors themselves, they may be able to exercise the right to:
- Vote on the administrator’s proposals
- Approve administrator’s fees
- Appoint an alternative administrator
- Form a creditor’s committee (of 3-5 creditors) to guide the process
In terms of the outcomes of pre-pack administrations, around 69% of pre-pack sales in 2020 resulted in a better return for creditors than if the business had been wound up. Conversely, around 11% of pre-pack sales resulted in a worse return for creditors. (The Insolvency Service, “Pre-pack administration evaluation: data analysis report”, page 12, published June 2020.)
Whilst the quick and efficient selling of a business via a pre pack sale can maximise the return for creditors. There are cases in which this doesn’t happen and creditors may be adversely affected by a pre-pack.
For example, their ability to recover debts owed by the company will be legally halted because of the administration. It may take some time for creditors to receive a payment from the administration whilst the process is ongoing.
Additionally, the creditor may not have preferential status and therefore may receive much less than they’re owed and possibly nothing at all.
How does a pre-pack impact employees?
A pre-pack administration can happen very quickly and have significant implications for employees of the insolvent company, as their jobs may be at risk or their employment may be transferred to the purchaser of the business.
The impact on employees will depend on the specific circumstances of the case, including the nature of the business and the terms of the pre-pack sale.
There are usually two potential scenarios:
- Continued business under a new owner: Where the company management has changed hands and the new owners intend to preserve the existing operation, it’s likely employees’ jobs will also be preserved and their employment transferred under TUPE legislation. New contracts of employment are sometimes negotiated.
- Continuation of part of the business under the new owner: It could be that only a certain part of the business is sold which could mean that not all parts of the business can be saved. In that situation, redundancies may follow.
In either scenario, there will be a requirement for the company to consult with the employees prior to the transfer.
It’s important for employees to seek advice and guidance from their trade union, employee representative, or an employment lawyer, who can provide personalised advice and support for the situation at hand.
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.
We want what’s best for all involved.
Talk to our friendly team today and receive sound advice on your next steps.