Craig Johns, of Insolvency Experts Bolton briefly explains the processes and differences. While both of these insolvency processes are governed by the same legislation, there is one key difference – namely the timing of the sale of the business/assets. A Pre Packaged sale of a business is the strategy employed by the Insolvency Practitioner (IP) as part of the Administration Process. In brief, a sale of the business and/or assets is agreed either immediately prior to or immediately upon the appointment of an administrator. Pre-pack administration can be controversial in that the sale is usually agreed before an administrator is appointed, whereas in a regular administration the administrator starts marketing the business after being appointed. Pre-pack administration often (but not always) involves selling the business and assets of the old company back to its current directors via a new company. The assets, work in progress, debtor book can all be paid for over a period of time. There is still a minimum limited marketing exercise undertaken by the IP but a sale can be complete within 5 – 10 business days.
What are the advantages to pre-pack administration?
There are several reasons why a pre-pack administration may be considered more beneficial than an administration: Continuity – it enables a going concern sale which is less likely to impact on business operations upon appointment of an administrator. Preservation of asset value – assets such as goodwill, debtors, and work in progress are more difficult to realise once an administrator is in office. This preservation can improve the return to creditors. Cost – the quicker a sale can be achieved, and the less time the administrator is in office, the less the risk of depletion of any cash reserves while trading. Additionally, the costs of administration may be lower as the administrator is not having to incur time trading the business, again improving the return to creditors. Positive PR – less scope for adverse publicity, particularly when employees continue under the new company with the same legal rights (under TUPE).
What are the downsides to a pre-pack administration?
While pre-pack sales may have the advantages outlined above, it is important that advisors and company directors are fully aware of all the issues, including those that may be deemed to be negative. Perception – pre-packaged sales sometimes trigger negative PR as some perceive that the company just continued to operate as normal while many debts are written off, particularly when the sale is made to connected parties. We’ve seen instances where businesses have policies in place which stop them trading with companies following a pre-packaged sale. Funding – while an administrator may offer deferred terms of payment, remember that the purchaser will have to be able to afford the business and assets of the company entering administration. The new company may also be refused credit for a period of time meaning that working capital requirements must be considered. Losing the business to a competitor – the IP has a duty to achieve the best possible outcome for creditors. In complying with their duties, the IP must market the business for sale in order to receive the best offer. This can result in competitive bidding and the possibility that the business may be sold elsewhere.
If your company is in financial distress contact our Insolvency Experts Bolton team for further advice on 0300 303 8284 or via our enquiries page.