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A Guide to Pre Pack Administration
The Insolvency Experts specialise in Company Administration and the formats in which this can be done for a business. In this guide, we will focus particularly on Pre-Pack Administration and how this differs from administration.
When a business is being sold through the pre-pack administration process, it is important that a professional and knowledgeable Insolvency Practitioner is consulted to oversee the process and ensure that the right route is taken.
What is pre-pack administration?
A Pre-Pack Administration is when a business is sold by an Administrator to management or a third-party purchaser either immediately upon or within a few days of their appointment.
Whilst administration and pre-pack administration are governed by the same legislations, there is one key difference between them; namely the timing of the sale of the business and assets. A pre packaged sale of a business is the strategy employed by the Insolvency Practitioner (IP) as part of the administration process. A sale of the business and/or assets is agreed either immediately prior to or immediately upon the appointment of an administrator.
It is a useful tool when the type of business means that ongoing marketing by an administrator may damage its goodwill and value, with the pre-pack administration process providing a discrete and swift transfer of ownership, allowing the company to enjoy a new start. Here at the Insolvency Experts, we are experienced in guiding clients through the range of pre pack administration rules that allow them to utilise this financial solution.
How does the Pre-Pack Administration process begin?
During a pre-pack administration, we would seek a valuation of the assets and negotiate a sale prior to the appointment of the administrator. Upon the appointment of the administrator, the business would be sold to the existing directors as a going concern. This option often allows the business to continue trading without too much disruption and most importantly, usually without the loss of trade or jobs.
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 and debtor book can all be paid for over a specified period of time. There is still a minimum limited marketing exercise undertaken by the Insolvency Practitioner, but a sale can be completed within 5 – 10 business days.
Pre-pack administration rules and requirements
As you would expect, there are several requirements and conditions which need to be met before a pre-pack administration process can be carried out. Insolvency Practitioners must be able to demonstrate that a pre-pack administration was the best option for a specific business and must report this to the relevant, official body.
Within this report, it must be proven that every other option was assessed, but that the pre-pack administration offered the best return for creditors. This is done to ensure that the process was done for the right reasons, in order to remove any fears that it was unethical.
Advantages and disadvantages of 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).
- Permanency of business – The business is protected by the courts, giving the administrator the power to sell the business and all of its assets. It writes off the debts of the existing company with no interruption to the trading business.
- Meeting of contractual obligations – The new company will often carry on trading as it did before the administration. Jobs are often saved as a result as it is sold as a going concern.
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 continued to operate as normal whilst many debts were written off. Some businesses even 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, 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, they 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.
Even with the potential negatives, it is important to remember that the main alternative to administration is Liquidation, whereby employees are more likely to lose jobs and the business does not continue trading. Therefore, if you want the business to continue to be viable, any type of administration that gives the company a chance to continue is preferable.
If you are considering a pre-pack administration, you’ll want to select an Insolvency Practitioner who can expertly advise you on exactly how to approach the process. Here at The Insolvency Experts, we are experienced in pre-pack administrations and can advise you on which course is right for your business – please contact us today if you believe this may be appropriate for you.
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