A Pre-Pack Administration is a mechanism used to sell the business and assets of an insolvent company. The assets are usually sold under a pre arranged sale whilst the business is preserved and migrated to a new Company. This is agreed with the Administrator (Licensed Insolvency Practitioner) prior to his/her appointment.
The new Company may be controlled by the existing Directors or a new set of owners who wish to purchase the assets of the old company. The return to the Company’s creditors must be greater than what would simply be achieved in a Liquidation of the Company. To satisfy this, the assets and business are purchased at market value that is determined by an independent professional valuation company.
Once the Company’s assets have an agreed sale and price, the Company then enters Administration so that the sale can take place. This process ensures that the business can continue without major disruption to the staff or suppliers of the Company and usually a quick sale limits disruption to trade. It’s not unusual for the assets to be purchased over a deferred period with an agreed repayment schedule.
With most Companies, the assets of the business hold greater value to the existing Directors. Usually a Pre-Pack sale to a new Company operated by the existing Directors not only provides the best outcome for the creditors of the old Company but it allows the preservation of the business allowing it to continue after insolvency.
Assets that are not sold as part of a Pre-Pack Administration process are usually disposed of by other means and the old Company is then closed down. All monies realised are then used to make repayments to the Company’s creditors on a pro rata basis after the costs and expenses of the Administration have been deducted. As a sale is pre arranged, the Directors have full transparency of what they are required to pay as well as the outcome of the procedure.
Most creditors believe that a Pre-Pack Administration only serves to benefit the new Company in allowing it to continue trading, whilst leaving its debts behind in the old Company. However; this is not the case and the use of a Pre-Pack Administration is often a practical and powerful tool in providing a better return to creditors whilst preserving key aspects of a business.
It usually takes between 1 and 4 weeks from initial engagement with the Directors of a Company to a formal sale of the Company’s assets to the new Company. This process length is determined by the complexity of your business.
The Benefits of Pre-Pack Administration
- Providing immediate protection from the Company’s creditors which allows time for a proper sale to be concluded as a going concern.
- A Pre-Pack Administration usually provides a higher return for creditors as opposed to Liquidation.
- Allows the preservation of jobs as well as the business enabling the continuation of trade.
- Ensures assets are retained and sold to the new Company minimising disruption to the business. This will assist with the preservation of contracts, employees, property and other equipment and assets of the company.
- Exposure to the costs associated and outcome prior to the Administration taking place.
The Disadvantages of Pre-Pack Administration
- Pre Pack Administration can also attract negative publicity if the former directors appear to be getting rid of their liabilities. However, with the company already in an insolvent position the alternative would usually have been a liquidation process which could potentially have resulted in the loss of jobs for the employees.
- TUPE “Transfer of Undertakings (Protection of Employment) “responsibilities will transfer to the new owner(s). In essence, the employees are transferred over to a new company and TUPE serves to protect the employees’ rights including all of their terms and conditions as per their contracts of employment. Therefore the purchasing company will inherit this liability from day one.
- Following the Administration process, the Administrator is required to file a report on the conduct of the directors. This report will seek to document any wrongful trading or fraudulent trading. Sometimes HMRC will rely on this report in determining a full VAT registration for the new company. They may impose certain conditions such as a security bond especially if the previous director/owner(s) had a history of non-payment of taxes.
The Pre-Pack Pool
There has been a lot of controversy surrounding the Pre Pack Administration process and due to such issues, the Government launched a consultation process on reform. The reforms follow the recommendations of an independent review into pre-packs for the government by Teresa Graham CBE in 2014. A report was issued providing a number of recommendations to the overall process. The pre pack reforms press release can be found here.
The report acknowledged the economic benefits of pre-packs and highlighted the need for greater transparency for creditors, employees and directors in the process, particularly when businesses are sold to so-called ‘connected parties’ – those who are already involved with the company. The reforms, which also include new guidance on marketing proposed ‘pre-packed’ businesses to third parties to get a better deal for creditors, are backed by creditor groups, government, the insolvency profession, and regulators.
Insolvency practitioners are subject to strict codes of practice to avoid abuse – this is called SIP 16 and has been changed to incorporate the above.
Is Pre-Pack Administration right for my Company?
Pre-Pack Administration may not be suitable for your business. There are other procedures that may be more beneficial such as a Company Voluntary Arrangement or maybe a Creditors’ Voluntary Liquidation.
For a pre-pack administration to be viable it has to demonstrate that it is in the best interests of creditors and the company.
Fortis are able to assist in providing an efficient service and advice if you believe your Company to be insolvent and we can determine whether a Pre-Pack Administration is the right solution for you if you feel you may still have a viable business.
Please contact us to arrange a free initial consultation in the strictest of confidence.
