In this article, we talk about the main characteristics of the two, including their process, advantages and disadvantages.
When are they applicable
A Pre-Pack Administration represents the sale of the business (or assets) of an insolvent company that is arranged before an Insolvency Practitioner’s (IP) appointment. Very often it is the speed of the pre-pack administration sale that is the critical point. It is also worth noting that sale details must demonstrate that the Pre-Pack was in the Creditor’s interests.
A company can opt for a Pre-Pack sale when any of the following conditions apply:
- There is insufficient funding available for the company to continue trading while looking for alternative potential purchasers.
- The directors want to preserve the value of the business (for example, when the company has skilled staff who might be tempted to seek employment elsewhere).
- The secured creditors want to acquire the business until the market conditions improve.
How do the two processes differ?
If you opt for a Pre-Pack Administration sale, the company will be sold by an administrator, administrative receiver or a liquidator, and not by the directors. The basic steps for a Pre-Pack sale are:
- The sale documents will be negotiated (the purchase price of the business).
- The administrator will be appointed.
- The administrator will execute the sale agreement.
- The selling company will be dissolved.
On the other hand, a Company Voluntary Arrangement cannot be proposed by creditors or shareholders, only by:
- The administrator (if the company is in Administration).
- The liquidator (if the company is being wound up).
- The directors.
These are the steps to enter a CVA:
- Directors have to choose an Insolvency Practitioner (IP).
- The IP will work out an arrangement, a Proposal including the payment schedule and the amount of debt the company will pay off.
The creditors will be invited to a meeting to vote. If 75% of creditors agree, the company will be allowed the CVA.
Key Facts about Pre-packs
According to The Insolvency Service, almost 1 in every three administrations involves a Pre-Pack Administration sale.
The main things to know before agreeing to a Pre-Pack Administration sale are:
- Directors lose any control/input over the company.
- Creditors won’t receive any dividends.
- Pre-Pack sales are much more expensive than CVAs.
- The administrator will control the cash and must pay tax and VAT.
- Everything from emails, purchase orders to invoices must state that the company is in Administration.
- Creditors may be unaware of this sale of business.
- Creditors will be paid off with the funds generated from the sale of assets.
- There will be an investigation into the conduct of directors.
CVA: Important facts
In a CVA, 75% of creditors must agree with the Proposal and with all the terms of the repayment schedule.
A CVA entails the following:
- The directors remain in control of their company.
- The company continues to trade and function just as usual.
- Customers don’t need to be notified that the company is in a CVA.
- Creditors get paid (they will receive dividends over time) but may be paid less than 100p in the £1.
- The fees for entering a CVA are paid out of cash flow.
- No more financial pressure for the directors.
- The company is protected from any aggressive actions that the creditors might initiate.
- The remaining debt of the company will be written off at the end of the CVA.
- Directors’ conduct will not be investigated.
Advantages & Disadvantages
The biggest benefit of a Pre-Pack Administration sale is that it ensures business continuity.
The advantages of a Pre-Pack Administration sale are:
- It is a quick way of selling an insolvent business (speed of sale).
- The business will continue trading (all activities will operate as usual).
- A Pre-Pack Administration sale can be an attractive solution for creditors.
Since it isn’t announced to the general public, with a Pre-Pack, the brand reputation won’t be damaged (potentially increase sales in the run).
- New investments are welcome.
- All historic debts of the insolvent company will be written off.
- Given that the company is sold to directors who are already familiar with the business, a Pre-Pack sale is more likely to increase the company’s chance of success in the future.
- Directors stay in control of the company.
- Staff get to keep their jobs.
- The main disadvantages of a Pre-Pack Administration sale are:
- Directors’ conduct will be investigated.
The liquidator can compile a report about the conduct of the directors, and if this shows that their conduct was immoral, HMRC can make the new company pay a bond before it can register for VAT (directors can even face prosecution).
Employees will keep their rights, salaries and all terms stated in their employment contract
- Which can prove to be a big expense for the newly founded company
- The public can view this solution as unethical.
- It may be difficult for the new company to obtain credit from suppliers or gain its customers’ trust.
- It is a very expensive procedure.
Both options can be applicable when a company becomes insolvent.
- A CVA is worth considering only if the insolvent company proves that it can provide a better return than the liquidation of the company.
- A CVA is much cheaper to implement than a Pre-Pack sale.
- To get a CVA, 75% of creditors have to vote in favour.
- With a Pre-Pack, the company doesn’t need the creditors’ approval.
- In a Pre-Pack Administration sale, directors’ conduct will be investigated.
- A Pre-Pack sale is a quick way of selling an insolvent business.
If you are unsure which one is the best solution for your insolvent company, contact us on 08000 746 757, via the live chat support, or call Mike Smith, our Turnaround Practitioner, on 07912 344 394.