Pre Pack Administration
In suitable circumstances, pre-pack administration sales can offer the most favorable outcome, minimizing costs and ensuring business continuity.
Pre-pack administration is not an option for all insolvency scenarios. When it is feasible, the process is intricate and demands careful planning, necessitating the guidance of seasoned experts. Even when a pre-pack is viable, inherent risks remain for insolvent company directors. Consequently, meticulous documentation from the outset is paramount.
Our seasoned Insolvency Practitioners possess extensive experience in all aspects of company insolvency, including pre-pack administrations. We specialize in advising SME clients and offer competitive rates. Please feel free to contact us for an initial, complimentary consultation via email or phone.
For a comprehensive understanding of this valuable insolvency tool, including its processes and procedures, consult our detailed guide.
Pre-Pack Administration: A Legal Mechanism for Asset Sales in Insolvency Proceedings
In the context of insolvency proceedings, a pre-pack sale is a legal method for selling a company’s assets to either a third party or the existing directors.
The phrase “pre-pack administration” is not officially recognized in UK insolvency law.
Instead, the term “pre-pack” is an industry term that refers to an insolvent company’s arrangement for the sale of its corporate assets prior to the appointment of an administrator.
The term “pre-pack” is derived from the nature of the preparatory work done before an insolvency practitioner assumes office.
Pre-packs can be a legal and effective way for an insolvent company to sell its business.
In many cases, the buyer will be the existing company directors, who will establish a new company from the remnants of the old one.
Why Choose Pre Pack Administration?
- Pre-pack administration can save you money. If your company is cash-strapped, you can avoid costly due diligence procedures by selling to people who already know and understand the business.
- Pre-pack administration can protect your brand reputation. If your business depends on skilled staff, you can avoid disrupting your operations and damaging your brand reputation by completing a pre-pack sale without alerting staff, customers, and suppliers.
- Pre-pack administration can preserve your brand identity. If your company has a well-known brand, you can continue to trade and operate under the same name, even if the company is sold to new owners.
When a company enters pre-pack administration, the following steps are taken:
Board Decision: The company’s board of directors evaluates all available options and decides on pre-pack administration.
Seek Expert Advice: The directors consult with qualified insolvency practitioners, such as accountants or Insolvency Practitioners.
Director Resolution: The directors pass a resolution indicating their intention to proceed with pre-pack administration and appoint an advisor.
Financial Documentation: Before considering any sale, the directors prepare detailed financial documents, including the company’s financial status, asset inventory, working capital, profit and loss forecasts, and other relevant information. This documentation serves as guidance for the Insolvency Practitioner.
Asset Valuation and Statement of Affairs: The Insolvency Practitioner prepares an official asset valuation and a Statement of Affairs.
Advertising and Sale: Despite having a pre-arranged buyer, the law requires that the business sale be advertised. If no other interested parties emerge, the sale to the existing directors (third party) proceeds. However, there is a risk of a competitor acquiring the company at this stage.
Meeting with Creditors: Following the sale, a meeting is held with company creditors to explain the process and rationale behind the pre-pack administration.
New Company Formation: The new owners can establish a new company using the acquired assets, including intellectual property like the brand name.
SIP 16 Insolvency Regulations: Statement of Insolvency Practice 16 (SIP 16) mandates that the sale of company assets should be independently valued and a fair market price paid. Additionally, the funds for the purchase must come from outside the company, meaning they must be personally paid by the purchaser.
SIP 16 Transparency and Fairness: SIP 16 ensures transparency and fairness in the sale of company assets. Newly appointed insolvency practitioners acting as administrators must approve the sale.
Advantages of a Pre-pack
Continuity for employees and business operations: A pre-pack administration can help preserve jobs and maintain ongoing business activities, minimizing disruption to the workforce and clientele.
Expeditious process: Pre-pack arrangements can be concluded relatively quickly, allowing for a swifter transition and minimizing the impact on business continuity.
Uninterrupted relationships with suppliers and customers: A pre-pack administration can help maintain stable relationships with suppliers and customers, ensuring continued supply chains and customer loyalty.
Isolation of old company’s debts: The pre-pack process ring-fences the debts of the old company, preventing them from encumbering the new entity.
Reduced costs compared to administration: Pre-pack administrations typically incur lower costs than traditional administration proceedings.
Limited public awareness and publicity: Pre-pack arrangements are often conducted discreetly, minimizing negative publicity and reputational damage.
Rapid completion of the pre-pack process: The pre-pack process itself is typically completed swiftly, facilitating a quicker resolution.
Disadvantages and Obstacles
Potential creditor objections to business valuation: Creditors may challenge the valuation of the business, potentially delaying or hindering the pre-pack process.
Risk of overlooked due diligence: When selling the business to a third party, the rapid pace of a pre-pack may lead to insufficient due diligence.
Potential for creditor dissatisfaction: As no court involvement is required in a pre-pack, creditors may feel their interests are not adequately considered, particularly unsecured creditors who may not be informed until the process is complete.
Continuation of old management’s mistakes: The possibility exists that the same directors responsible for the old company’s financial troubles may continue in their roles, potentially repeating past mistakes.
Potential reputational damage: Suppliers may perceive the pre-pack process as lacking proper due diligence, potentially harming the company’s reputation.
Challenges in raising pre-pack financing: Securing the necessary funding for a pre-pack administration can be complex and may not always be successful.
Uncertainty regarding supplier and customer contracts: Contractual obligations with suppliers and customers may become problematic, with no guarantee of continued business relationships under the same terms.
When a company enters pre-pack administration, employees with valuable skills are more likely to retain their jobs compared to traditional administration processes.
Traditional administration processes can be lengthy and lead to valuable employees seeking employment elsewhere, whereas pre-pack administration facilitates a swift sale of the entire business.
As a result of the Transfer of Undertakings (Protection of Employment) regulations, employees are seamlessly transferred to the new company, preserving their employment rights and conditions.