Pre-Pack Administration is a company rescue procedure whereby, as an appointed insolvency practitioner, we would arrange the sale of your insolvent business and its assets prior to the company being put into administration. Then, once the company is put into formal administration, the business and its assets are immediately sold.
Pre-Pack administration provides a seamless transfer of the business and its assets so that trading can continue, contracts can be upheld, jobs can be protected and the business can be saved.
Selling assets via a pre-pack sale can also maximise the amount of cash available to pay debts owed to creditors.
One of the key benefits of a pre-pack administration is that the company’s current directors can offer to purchase some or all of the business assets, and then transfer them across to a newly established company. The pre-pack administration process is designed to be open and fair, so the directors would have to pay the market valuation for the business and its assets, and they would have to compete in the open market against any other interested parties.
When Can A Company Enter Into The Pre-Pack Administration Process?
Before we could recommend and assist with a pre-pack sale of a company, certain criteria must be met:
- The company must be insolvent and have no viable prospect of recovery.
- There must be no other solution with greater benefit to the company’s creditors.
- The buyer must be able to pay fair market value for the assets out of their own personal funds.
These criteria make the pre-pack sale of a business legal and ethical. Company directors and insolvency practitioners are required by law to act in the best interests of the insolvent company's creditors. As the proceeds from the sale of assets are distributed amongst creditors, a pre-pack administration cannot be used unless it results in the best outcome for creditors.
The Pre-Pack Administration Process
If your company is struggling with its finances and is facing pressure from its creditors, you should seek advice from an experienced insolvency practitioner to determine whether your business is eligible for a pre-pack sale, and whether pre-pack administration would be the best option for your business. You can contact us at any time via telephone, email or online live chat for advice and guidance. We can visit you at your office – wherever you are located – to look into your situation and advise you on your options.
Once we have assessed your case, we will be able to determine whether pre-pack administration is a viable rescue solution for your business. If we determine that it is not the best course of action, we may recommend another solution – such as a company voluntary arrangement (CVA), voluntary liquidation, or standard administration.
If we determine that pre-pack administration is the best rescue option for your business, we would begin the pre-pack administration process by obtaining a valuation of your company’s assets, creating a statement of affairs, and drawing up an official administration proposal.
We would then advertise the business for sale anonymously (without the company being named), to establish any interest.
Then, we would arrange a sale of the business and its assets to the highest-bidding interested party, under a new company (‘newco’). The proceeds from the sale are then used to pay a dividend to the old company’s creditors.
Once the sale has been agreed in principle, we would submit the administration statement to the court. At this point any legal action by your creditors against your company would be halted. Immediately, the old company’s assets are sold and legally transferred to the new buyer.
After the sale of assets has been completed, we would hold a meeting with the old company’s creditors to give a thorough explanation of why the pre-pack administration was undertaken. We do not need the consent of creditors to put the business through a pre-pack sale, however, during the post-sale creditors’ meeting we are legally obliged to disclose certain information about the sale.
What is actually sold during a Pre-Pack Administration?
There are often some misunderstandings with pre-pack administration when it comes to what is actually being sold. To clarify, during the pre-pack administration process, the business and assets are up for sale but not the existing limited company itself.
Once the pre-pack administration is complete, the company may be trading with many of the previous clients and suppliers, and perhaps have many of the same employees; but it will be a totally new company with a new name and new owners.
Everything that is being sold will be specified in the sale and purchase agreement. It is recommended that the company buying the assets uses their own solicitor to advise them on the agreement.
What Is The Difference Between Pre-Pack Administration & Administration?
The key difference between pre-pack administration and standard company administration is that, with pre-pack administration, the sale of a business and assets are negotiated and agreed before the company is put into administration. With standard company administration, we would take control of the company and conduct a sale of assets after the company is put into administration. This process is much slower and less predictable.
The Advantages & Disadvantages of Pre-Pack Administration
It is important to be aware of the pros and cons of any business rescue procedure, so you can make informed decisions about the future of your business. Listed below are some of the key advantages and disadvantages of pre-pack administration. For further information, advice and guidance on pre-pack administration, you can contact us at any time via telephone, email or online live chat.
Advantages of Pre-Pack Administration:
- Continuity of the business. Following the pre-pack sale, the business can carry on trading as it had been. Employees’ jobs are saved and contracts are maintained. Suppliers also benefit from this continuity because, under the new company with better cash flow, invoices should be paid on time.
- Debts can be paid to creditors quickly. Under a pre-pack sale, assets are sold for cash which can be distributed amongst creditors to pay off the old company’s debts. Under a standard company administration, creditors do not receive any returns until the administration ends via liquidation, or CVA, or any other measure. This can take many months, up to a year, or even longer.
- The old company is released from contracts. Some of the contracts held by the old company may not be needed by the new company, such as property leases or equipment hire - the purchasing company may well have much better income and expenditure models. The old company can have these contracts terminated legally.
Disadvantages of Pre-Pack Administration:
- A perception of ‘abuse of the system’. Whilst pre-pack administration is perfectly ethical and legal, there is sometimes a misconception that the new company has been formed just so that the old company can avoid paying its debts. As a result, some future clients may be unwilling to deal with the new company, and creditors may restrict future credit limits or they may refuse credit altogether.
- TUPE responsibilities will carry across to the new company. The 2006 “Transfer of Undertakings (Protection of Employment)”, or ‘TUPE’ regulations, mandate that there are certain rules which must be complied with when transferring a business to a new company. These rules are designed to protect employees from losing their jobs during insolvency procedures. This means that any transfer of employees to the new company must be in line with TUPE regulations. There are penalties for breaking these regulations. If the business is going to be essentially the same except under new owners, TUPE will be a major consideration. For more in depth advice on TUPE regulations and their implications on pre-pack administration, you can contact us as any time via telephone, email or online live chat.
- Invoices can continue to accrue while sales negotiations take place. The fact that a business can continue trading uninterrupted whilst pre-pack negotiations take place is seen as a major benefit of pre-pack administration. However, this can also work against the company. If negotiations take a while, invoices continue to mount up. Creditors may not be willing to extend credit to the new company because of the fact that they lost a sizeable amount of money to the old company.
- The conduct of directors may be investigated. We are required to submit a report on the conduct of the directors to the court as part of the administration process. HMRC may not allow for a VAT registration for the new company if the director of the old company (now director of the new company) had a history of non-payment of taxes. A large security deposit may be required before the new company can do business.
Generally, the benefits of pre-pack administration outweigh any disadvantages if the pre-pack sale is handled properly. As highly experienced and skilled insolvency professionals, we can analyse your case, and devise a well thought out plan to allow the pre-pack sale of your business to go as smoothly as possible.
More Information, Advice & Guidance on Pre-Pack Administration
The prospect of putting your company through the administration process can seem daunting and stressful. Though, in some cases, pre-pack administration can be the most beneficial company rescue procedure for directors, employees and creditors.
If your company is facing insolvency and is experiencing pressure from creditors, it is important to act quickly to avoid court action and achieve the best possible result. We can assess your case and advise you so that you can make an informed decision. We have guided many businesses through the pre-pack administration process, to facilitate a quick and orderly sale of business assets from the old company to a new company.
If you would like to know more about the pre-pack administration process and whether it is right for your company, we are always available to answer any questions over the phone, via email or live chat. We can visit you at your office in absolute confidentiality to discuss your situation and advise you on your options.