What is a Pre Pack Administration?
Pre pack administration sales can provide the best possible outcome in the right circumstances, reducing costs and maintaining business continuity.
The possibility to proceed with a pre-pack administration does not apply in many insolvency situations. Where possible, the process is complex and a lot of planning is required so it is essential to have good, experienced advice. Even where a pre-pack is a possibility, there are inherent risks for insolvent company directors, so documenting the process from an early stage is very important.
Our Insolvency Practitioners are very experienced in all forms of company insolvency including pre-pack administrations. We specailise in advising sme clients and our costs are proportionate, so please do get in contact for an initial, free discussion either by email or phone.
Read our full guide to this useful insolvency tool, including process and procedures.
Pre Pack Administration: Definition
A pre pack sale is a mechanism by which a company’s assets may be legally sold either to a third party or existing directors, as part of an insolvency process.
The term ‘pre pack administration’ doesn’t actually exist within UK insolvency law.
Rather, the term ‘pre pack’ is industry terminology refering to an insolvent businesses arrangement of the sale of its corporate 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 company from the ashes of the old.
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.
If a well known brand is involved, the brand may continue to trade and operate, while simply operated within a new limited company structure by its new owners.
What Happens in a Pre Pack Administration?
The pre pack administration process is as follows.
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.
- Seek advice from a qualified and licensed insolvency practitioners such as ourselves.
- Directors must pass a resolution stating they are considering the pre pack administration. That resolution includes appointing an advisor such as an Insolvency Practitioners 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 Compliance – 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 (i.e. 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 new owners are free to begin a new company using the purchased assets. These may include intellectual property such as the brand name.
SIP 16 Insolvency Regulations
The Statement of Insolvency Practice 16 (SIP 16) states that the sale of the company 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.
Statement of Insolvency Practice 16 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
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 old 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 and obstacles
- A creditor may object to the valuation 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 needed so creditors may complain that their interests have been overlooked. Unsecured creditors, in particular, are often not informed until the process has been completed. Sometimes this leaves unsecured creditors feeling disenfranchised.
- The same directors who ran the old company prior may be the same directors buying the company via a pre pack administration 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;
- Raising finance to fund the pre-pack is complex and may fail.
- Contracts with suppliers and customers may well be problematic. There is no guarantee they will be contractually obliged or will agree to continue trading and/or on the same terms as with the existing business.
Employee Rights during Pre Pack Administration
Interestingly a pre pack administration 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.