Pre Pack Administration
Pre-pack administration is a company rescue procedure, offering a swift and efficient means of rescuing financially distressed businesses.
This article delves into its processes, benefits, drawbacks, and the regulatory framework that governs it.
- What is a Pre Pack Administration?
- Understanding Pre-Pack Administration
- Pre-Pack Administration: Process
- Pros and Cons of Pre-packaged Administration
- What’s the Role of Insolvency Practitioners in a Pre Pack Administration?
- What’s the Regulation around Pre-Packs?
- What is a Pre-Pack Pool?
- What happens to staff in a pre-pack administration?
- What happens to shareholders in a pre pack?
What is a Pre Pack Administration?
Pre-pack administration is a process in the UK where a company arranges to sell its assets or business to a buyer before appointing administrators. This is typically done when a company is insolvent but has valuable assets or operations that could be viable under new ownership. The process is arranged privately between the company directors and a prospective buyer, with the guidance of insolvency practitioners.
Understanding Pre-Pack Administration
Pre-pack administration can be a contentious process, primarily due to its potential lack of transparency and concerns about fairness to creditors. Often, the sale of assets or the business is made to the company’s current directors or stakeholders. This aspect can raise questions about the integrity of the transaction, particularly regarding whether the best possible deal for creditors was achieved.
The process, while legal and prevalent in the UK, is closely scrutinised to ensure that it is conducted fairly and in the best interests of all parties involved.
Pre-Pack Administration: Process
The process of pre-pack administration in the UK involves several key steps designed to ensure the quick and efficient sale of a company’s assets or business, often to mitigate the effects of insolvency. It is a structured process that typically unfolds as follows:
- The process begins when a company recognises it is facing insolvency, unable to pay debts as they fall due, yet has viable business elements worth preserving.
- he company appoints insolvency practitioners (IPs) who advise on the viability of a pre-pack administration.
- The IPs conduct a thorough valuation of the company’s assets.
- The IPs may discreetly market the business or its assets to potential buyers. This step is sensitive as the business is still operational and maintaining confidentiality is often key to preserving its value.
- Interested buyers, which might include the company’s existing management, submit their offers.
- Once a buyer is selected, a sale agreement is prepared. .
- The company formally enters into administration. The appointed administrators take control of the company and oversee the completion of the pre-pack sale. This step often occurs rapidly to minimise disruption to the business.
- After the sale, creditors are informed about the administration and the pre-pack sale. They receive a detailed report explaining why this route was chosen and how it benefits all parties.
- The proceeds from the sale are distributed to the creditors. Secured creditors are typically paid first, followed by preferential and then unsecured creditors.
- Depending on the terms of the sale, the business may continue to operate under new ownership, or it might be closed down if only certain assets were sold.
Throughout this process, transparency and adherence to legal requirements are paramount. The IPs must ensure that the pre-pack administration is in the best interests of the creditors and that all actions are compliant with UK insolvency laws. This process aims to maximise returns to creditors while preserving the underlying business value and protecting jobs.
Pros and Cons of Pre-packaged Administration
Pros
- Job Security for Employees: Pre-pack administration helps keep employees in their jobs, offering stability during the transition.
- Quick Arrangement: This process can be set up quickly, reducing the time the business is in limbo.
- Continuity for Suppliers and Customers: It ensures business goes on as usual for suppliers and customers, maintaining important relationships.
- Debt Isolation: The old company’s debts are contained, allowing the new company to start without these financial burdens.
- Cost-Effective: Generally, pre-pack administration is cheaper than going through a full administration process.
- Less Publicity: This approach usually attracts less attention, helping to maintain the business’s reputation.
- Speed of the Process: The rapid nature of pre-pack administration helps resolve uncertainty for everyone involved more quickly.
Cons
- Valuation Disputes: Creditors might disagree with how the business is valued, feeling their interests are undervalued.
- Overlooked Due Diligence: In a rapid sale, especially to a third party, there’s a risk of not conducting thorough due diligence, which might overlook critical issues.
- Creditor Concerns: Without a court process, creditors, especially unsecured ones, may feel their interests are ignored. They’re often informed late in the process, leading to dissatisfaction.
- Risk of Repeat Mistakes: If the same directors who managed the struggling company buy it back, they might repeat past mistakes. Although this is being addressed in new laws, it remains a concern.
- Reputation Risks: Suppliers and others might view the process negatively if they believe proper procedures weren’t followed, affecting the company’s reputation.
- Complex Financing: Getting finance for a pre-pack can be difficult and may not always succeed, posing a significant hurdle.
- Contractual Challenges: There’s no guarantee that contracts with suppliers and customers will continue as before. They might not agree to the same terms with the new business, leading to potential disruptions.
>>Read our full article on Advantages & Disadvantages of a Pre-Pack Administration
What’s the Role of Insolvency Practitioners in a Pre Pack Administration?
Insolvency practitioners (IPs) play a key role in pre-pack administration, acting as independent advisors and facilitators, while safeguarding the interests of all stakeholders.
- IPs conduct a thorough assessment of the company’s financial situation to determine if pre-pack administration is a viable option. They analyze the company’s assets, liabilities, cash flow, and overall financial health to make an informed decision.
- If pre-pack administration is deemed suitable, IPs develop a comprehensive strategy tailored to the specific circumstances of the company. This strategy outlines the steps involved in the pre-pack process, including marketing the business, negotiating with potential buyers, and structuring the sale agreement.
- IPs meticulously assess the fair market value of the company’s assets. This valuation serves as the basis for negotiating the sale price and ensures that creditors receive an equitable return on their investments.
- IPs discreetly market the business or its assets to potential buyers, maintaining confidentiality to protect the company’s reputation and value.
- IPs evaluate the proposals submitted by interested buyers, prioritising the interests of creditors in securing the most favourable deal. They consider factors such as the proposed sale price, the buyer’s financial capacity, and the overall viability of the sale plan.
- Upon selecting a buyer, IPs draft a comprehensive sale agreement. This agreement clearly outlines the terms of the sale, including the assets to be transferred, the negotiated price, the payment terms, and the conditions for completion.
- IPs facilitate the completion of the pre-pack sale, ensuring a smooth transition of the business or assets to the new owner. They coordinate with relevant parties, such as lawyers, accountants, and regulatory bodies, to finalize the sale process.
- IPs maintain open and transparent communication with creditors throughout the pre-pack administration process. They provide regular updates on the progress of the sale and explain the rationale behind the decisions made.
- IPs oversee the distribution of the proceeds from the sale to creditors in accordance with UK insolvency laws. They ensure that secured creditors receive priority, followed by preferential and then unsecured creditors.
- IPs strictly adhere to the legal and ethical requirements governing pre-pack administration. They maintain transparency and act in the best interests of all stakeholders, including creditors, employees, and the company itself.
What’s the Regulation around Pre-Packs?
Regulation around pre-pack administrations in the UK primarily falls under the Insolvency Act 1986 and its subsequent amendments. This legislation provides the foundational legal framework for pre-pack administrations, outlining the process and the responsibilities of insolvency practitioners.
Additionally, a crucial guideline specific to pre-packs is the Statement of Insolvency Practice 16 (SIP 16). SIP 16 is designed to ensure transparency and fairness in pre-pack sales, particularly focusing on the role and conduct of insolvency practitioners. It mandates detailed disclosure and reporting requirements to safeguard the interests of creditors and maintain public confidence in the process.
What is a Pre-Pack Pool?
The Pre-Pack Pool is an independent group that helps to make sure that pre-pack sales to connected parties are fair and transparent. They do this by reviewing the sale and making sure that the connected party is financially stable, that the sale price is fair, and that the sale was done in a way that is open and competitive. This helps to protect the interests of creditors and other stakeholders.
Qualifying Evaluator’s Report: Ensuring Fair Pre-Pack Sales
A Qualifying Evaluator acts as an impartial assessor, carefully examining the proposed pre-pack sale to a connected party. This evaluation entails a thorough review of various factors, including:
- Financial Viability of the Connected Party: The evaluator assesses the financial strength and capabilities of the connected party to confirm their ability to effectively manage the acquired business.
- Valuation Methodology: The evaluator scrutinizes the valuation methodology employed to determine whether the proposed sale price accurately reflects the fair market value of the assets or business being sold.
- Transparency and Fairness of the Sale Process: The evaluator examines the overall sale process to ensure it was conducted in a transparent and competitive manner, free from any conflicts of interest.
What happens to staff in a pre-pack administration?
For staff, the specific impact of a pre-pack administration can vary, but key points include:
- Transfer of Employment: Employees may be transferred to the new owner of the business under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE protects employees’ terms and conditions of employment, ensuring they are transferred to the new employer. This means that, in many cases, employees will keep their jobs under the new ownership with the same terms and conditions.
- Redundancies: If the entire business is not sold or if the new owner does not require all current staff, redundancies may occur. Employees made redundant are entitled to certain rights, including redundancy pay (subject to eligibility criteria such as length of service), notice periods, and consultation.
- Arrears of Pay and Other Entitlements: If there are arrears of pay or other entitlements (like holiday pay), employees may claim these from the National Insurance Fund (NIF), up to a statutory limit. This can include redundancy pay, unpaid wages for up to 8 weeks, up to 6 weeks of holiday pay, and certain other entitlements.
- Communication and Consultation: The administrators should inform and consult with employees about the administration process and any potential changes to their employment. This is part of the legal requirements under both insolvency and employment law.
- Claiming from the Insolvency Service: If the employer is insolvent and unable to pay wages, redundancy pay, or other entitlements, employees can apply to the Insolvency Service’s Redundancy Payments Service for payment from the NIF.
It’s important for employees affected by a pre-pack administration to seek advice and information specific to their situation, as outcomes can vary widely depending on the details of the sale and transfer.
What happens to shareholders in a pre pack?
In a pre-pack administration, shareholders often find their shares becoming worthless or significantly reduced in value. The primary focus of a pre-pack administration is to secure the best outcome for creditors, rather than shareholders. If the company’s assets are sold, proceeds go first to secured creditors and then to unsecured creditors. Shareholders are last in the hierarchy of repayment and typically receive nothing unless all creditors are paid in full, which is rare in insolvency situations.
