Pre-Pack Administration Guide
The term ‘pre-pack’ administration doesn’t actually exist within UK insolvency law. Rather, the term refers to an insolvent company’s arrangement of the sale of its assets prior to the appointment of an administrator. It is the nature of the preparatory work completed before any insolvency practitioner takes office that provides the term.
For an insolvent company, pre-packs can be a legal, effective way to sell the business on. Often, the buyer will actually be the existing company directors, who form a new LTD company. All of the assets of the old company must be sold at a fair price.
How does Pre-Pack Administration Work?
Once the board of directors has weighed up all of the options available to the company and decided on pre-pack administration, the following process applies.
- Directors must pass a resolution stating they are considered the matter. That resolution includes appointing an advisor such as an Insolvency Practitioner or accountant.
- Before any sale can be considered, directors must prepare detailed financial documentation illustrating the state of the company, its assets, current working capital, profit and loss forecasts and so forth. These will provide guidance for the Insolvency Practitioner.
- IP prepares an official asset valuation and a Statement of Affairs.
- Ensuring Compliancy – Even if a buyer has already been found, the law states that the business sale must be advertised. If there is no interest, the sale to the third party (ie existing directors) can proceed. NB, there is a risk at this point the company could be purchased by a competitor.
- After the sale, there is a meeting with company creditors to explain what has occurred and why.
The Statement of Insolvency Practice 16 (SIP 16) regulations were designed to bring about some transparency to the pre-pack administration process.
SIP 16 states that the sale of the assets should have been independently valued and a reasonable, fair commercial price paid; and the funds paid must come from ‘outside’ of the company, that is to say, paid personally by the purchaser. This process provides a degree of transparency and fairness to the sale of the company assets and the newly appointed insolvency practitioners acting as administrators will need to approve the sale.
Advantages of a Pre-pack Administration?
Although this is not a definitive list the key benefits are:
- Continuity for employees;
- The pre-pack can be arranged relatively quickly;
- Continuity for suppliers and customers alike;
- The indebtedness of the original company is ring-fenced;
- The costs are usually a lot less than administration;
- There are less disruptive awareness and publicity;
- The speed of the pre-pack process itself.
Disadvantages of a Pre-pack Administration
- A creditor may object to the value of the business;
- If the business is sold to a third party then as the process is completed quickly appropriate due diligence may be overlooked;
- Unlike an administration, no court process will be enacted so creditors may complain that their interests been overlooked;
- The same directors who ran the company prior may be the same directors buying the company via a pre-pack and they may make the same mistakes going forward (this is being addressed in proposed legislation);
- The company reputation may be affected if suppliers believe the due process was not followed appropriately;
Why not Just Place the Company Into Administration?
The costs of voluntary administration on a company can be very large and the process is often quite protracted; public awareness can cause unease and often key employees may choose to leave. The process of administration, when compared to a pre-pack sale, may also cause disquiet among suppliers and customers alike. When viewed in this light it is more easily understandable how a pre-pack sale, as it is not made public, may provide better value for everyone all round including creditors than ‘simple’ administration.
Why Choose Pre-Pack Administration?
If the company is cash-strapped and the existing shareholders or directors can see a viable future for the business then costly due diligence procedures can be avoided by selling to people who know the business and understand its potential.
If your business depends on skilled staff and administration looks inevitable then a disruptive insolvency procedure may be avoided by completing a pre-pack sale of the business without staff, customers and suppliers becoming aware.
What is the Difference Between a Pre-pack and a Phoenix?
In practical terms there is very little difference between a phoenix and a pre-pack; this adds greatly to the suspicion of pre-packs. The regulators have set out clear guidelines governing the role of the insolvency practitioner as administrator to minimise the chances of the inherent ‘bias’ built into the pre-pack appointment process.
Critically speaking, a ‘Phoenix company’ is company fraud and the distinguishing factor is that the company assets will have been sold off at an under-value; often to a connected party (Often the same directors). The fraudulent phoenix company will often set up overnight using the same name and same directors.
The selling of assets at an undervalue to a connected party hits at the very heart of company section 238 of the Insolvency Act 1986 and a directors’ responsibility to keep losses to a minimum for creditors. Failure to do so can see the directors made personally liable. When a company becomes insolvent the director’s responsibilities are to the creditors and ensuring their (Creditors) interests are a priority. By selling off assets at an undervalue this is a direct attack against the creditor’s interests.
To be clear, within current insolvency law, there is nothing illegal about a director setting up a new limited company provided they are not bankrupt or disqualified directors and they may even buy the assets of the old company including buying the use of the same name. What determines the legality of the process is that everyone involved in the sale of insolvent company assets and starting a new company must follow the rules and law as set out and any failure to do so can lead to prosecution by the insolvency service.
For these reasons we always advise taking professional insolvency advice from an insolvency consultant like ourselves.
Pre Pack Administration and Employees (Tupe)
Interestingly a pre-pack is likely to be better for an employee where the skill-sets of the employees are thought valuable. The reasoning is that with an administration process they (administrations) can often turn into a lengthy affair and valuable staff may seek employment elsewhere. A pre-pack (administration), however, allows the sale of the complete business in a timely fashion; staff are transferred across to the new company via the Transfer of Undertakings (Protection of Employment) regulations.
Can Creditors Challenge a Pre-Pack?
Provided the creditor can demonstrate good cause, For example, administrators/insolvency practitioners have clearly set guidelines of appropriate conduct under SIP 16 which were introduced in January 2009. In addition, a creditor can bring an action under paragraph 74 and 75 of schedule B1 of the Insolvency Act 1986 [against the administrator if the creditor believes their rights have been harmed, or the administrator is not performing their functions quickly or efficiently enough].
Probably a cheaper and more informal way of addressing a complaint is to call the insolvency service’s helpline on 020 7291 6772; or email: IPRegulation.email@example.com; or write to:
The Insolvency Service
Insolvency Practitioners Regulation Section
4 Abbey Orchard Street