A pre-pack administration is an insolvency procedure that aims to rescue a struggling business. It does this by selling some or all of an insolvent company’s business and assets in a sale that’s marketed and agreed before an administrator is appointed. The agreed sale is completed almost immediately after their appointment.
The assets that might be sold are the company’s brand, intellectual property rights, premises, physical assets (this might include machinery or vehicles), debtors, goodwill and stock.
In some cases, it’s possible for a new company owned by the previous company director(s) to be the buyer in a pre-pack administration.
For a pre-pack to be viable for your business, it must have the potential to be profitable in the future and have sufficient value still in it to attract buyers or investors.
Talk to our licensed insolvency practitioners about whether a pre-pack administration would work for your business.
When is a pre-pack administration used?
Pre-pack administration is typically used when a company is facing insolvency but has a viable underlying business that can be rescued. Businesses facing these challenges might be able to benefit from a pre-pack:
Cash-flow insolvency: If the company can’t pay its debts as and when they fall due, but its balance sheet shows that assets exceed liabilities, a pre-pack may allow the business to restructure. This means a ‘slimmed down’ version of the business can move forward in a new company
Balance-sheet insolvency: The company’s liabilities might exceed its assets but it still has a profitable core business. By shedding the unprofitable parts through a pre-pack, the viable parts can continue trading without the burden of historic debts.
Funding issues: The company’s liabilities might exceed its assets. If it still has a profitable core business, but is struggling to raise funding or investment into an insolvent company, a pre-pack may enable a refinancing of the business.
Advantages of pre-pack administration
Pre-pack administration offers several advantages for company directors looking to restructure or rescue their business.
Business could continue as normal: Pre-pack administration can help maintain business continuity by minimising disruptions to operations. This is crucial for preserving customer and supplier relationships, helping the transition to the new ownership to be a seamless process.
It preserves business value: Pre-arranging the sale of the business and its assets to a new owner can avoid closure and loss of profits, because the company is allowed to continue trading with minimal disruption. This helps maximise returns for creditors.
It can save jobs: Because the business can often transition to the new owner without interruption, employees and their roles are more likely to be retained. Their rights and obligations transfer to the purchaser under TUPE Regulations. This provides stability and keeps skilled staff, customer relationships and operational knowledge in the company.
Creditors get the best deal: By selling the business as a going concern, it might be possible to get a higher price for the company’s goodwill, debtors and assets. In turn this could mean more funds are available for distribution to creditors.
Disadvantages of pre-pack administration
There are some potential disadvantages of pre-pack administration too. A pre-pack administration must be managed with care by a licensed insolvency practitioner to address these potential downsides.
Publicity in the press: Pre-pack administrations are often reported in the press, potentially leading to negative publicity for the company. This could damage the reputation of the business and the trust of customers, suppliers and employees. However, with a little planning it is possible to control the narrative around this process.
Acquisition by competitors: While it might be ideal for the new owners to be one or more of the existing company directors, the administrator is legally obliged to get the best result for creditors. This could mean that the business is sold to a competitor.
Directors’ positions could be at risk: While the current directors or owners are usually the most likely buyers as they already have a good existing knowledge of the business, a new owner could take control. In this case, they might want to install their own management team, which can put the current directors’ roles in jeopardy.
VAT security deposit for HMRC debts: If the company owes money to HMRC, it may require a security deposit for VAT before the ‘newco’ can start trading. This deposit protects against future failures to pay VAT.
Role of a licensed insolvency practitioner in a pre-pack administration
A pre-pack administration is a legal insolvency process and needs the involvement of a licensed insolvency practitioner, acting as Administrator. If you’d like to know more about the process, our licensed insolvency practitioners are here to answer your questions
Choosing the right licensed insolvency practitioner is crucial. They’ll oversee the entire process, so you’ll want someone experienced, reputable and well-versed in pre-pack administrations.
Completing the sale quickly: In a pre-pack administration, the business and assets are marketed for sale before the company officially enters administration. Once an administrator is appointed, they work quickly to complete the pre-negotiated sale. This can happen in just a few weeks.
The sale proceeds go to the administrator: They’ll use those funds to repay creditors based on their priority level. Secured creditors are paid first from any assets over which they have security. Any remaining proceeds go toward preferential creditors, followed by unsecured creditors.
Investigating and reporting: Within eight weeks of the pre-pack, the administrator must send an initial progress report to creditors and Companies House, detailing the administration process and outcomes. The administrator must also investigate the conduct of the directors. This is a standard part of any insolvency process and most often finds no fault with the director(s) conduct.
Dealing with creditor claims: Creditors can still make claims on any remaining assets or monies that come from the pre-pack sale. The administrator is responsible for adjudicating these claims and making payments if funds allow.
Could pre-pack administration be right for you?
Every business’ situation is different. We’ll work with you to assess how viable this form of business rescue is for your business. If it’s a viable option, then a pre-pack administration could be the start of a brighter future for your business.
Talk to our licensed insolvency practitioners about whether a pre-pack administration would work for your business.
