Pre pack administration is a type of insolvency procedure that allows a company to sell its assets before entering into formal administration.
This process is typically used when a company is experiencing financial difficulties and needs to take swift action to protect its assets and avoid the risk of creditors seizing them.
The process involves appointing an administrator, who will then negotiate the sale of the company’s assets to a new owner.
The sale is typically arranged before the company enters administration, and the new owner will take control of the assets immediately upon completion of the sale.
This type of restructuring process can be a valuable tool for companies in financial distress, as it allows them to preserve their assets and potentially avoid the need for liquidation.
However, it can also be controversial, as some stakeholders may feel that the process lacks transparency and can disadvantage certain parties, such as unsecured creditors
What is a pre pack administration?
A pre-pack administration is a process used in the business world to facilitate the sale and continuation of a financially distressed company. In this arrangement, a struggling company’s assets and business operations are negotiated and sold to a new entity before the formal insolvency proceedings begin.
This strategy aims to preserve the company’s value and operations while minimizing disruption to its employees, customers, and suppliers. A pre-pack administration involves careful planning and coordination between the company’s directors, insolvency practitioners, potential buyers, and creditors.
While it can offer a lifeline to businesses facing financial difficulties, critics argue that it may lack transparency and hinder the best possible outcome for creditors, as the process is executed quickly and often without market testing.
When would a pre pack administration be used?
A pre-pack administration is typically used when a financially distressed company faces the imminent risk of insolvency but still possesses viable business operations and valuable assets.
This strategy is employed to swiftly secure the company’s future by arranging a sale of its assets and business to a new entity before formal insolvency procedures are initiated.
By doing so, the company aims to maximize the value of its assets, maintain its ongoing operations, and preserve jobs. This approach is particularly beneficial when time is of the essence, as it minimizes the disruption that a traditional insolvency process might entail.
The use of pre-pack administrations can be controversial, as critics argue that they may lack transparency and could potentially disadvantage creditors by not allowing for competitive bidding or market testing of the company’s assets.
What’s the process?
If your company finds itself under significant pressure from creditors – such as facing the looming threats of liquidation or receivership – taking swift action is imperative. We strongly recommend reaching out to a licensed insolvency practitioner (IP) for guidance as soon as possible.
The IP will meticulously evaluate your business to devise the most suitable course of action. Every conceivable option must be considered by the IP, ensuring that the chosen procedure optimizes returns for the creditors.
Opting for a pre-pack administration would likely entail the following steps:
- The IP will orchestrate an assessment of the company’s assets, compiling a comprehensive statement of its financial status.
- If a sale to a new entity (newco) is planned, a detailed blueprint demonstrating the viability and capability of the newco to acquire the business is essential.
- In the case of a sale to an existing company, the IP will secure copies of the buyer’s financial records and managerial information, ensuring their viability and financial capacity.
- The IP is also responsible for marketing the business for sale. If no interest is generated, the sale can proceed to the newco or the existing company (not the company soon to enter administration).
- In the event of offers being received, the IP can then select the most promising buyer with the most attractive offer, potentially leading to a sale to a competitor.
- Following the preliminary agreement of the deal, the company enters administration, prompting a suspension of all legal actions against it (without necessitating court approval or administrator consent).
- The administrator initiates the pre-pack administration, leading to the sale of the business.
- A meeting with creditors is organized by the administrator, elucidating the rationale behind choosing this particular insolvency procedure, often culminating in a subsequent recommendation for liquidation.
- Typically, creditors endorse the recommendation, resulting in the company’s liquidation and the proportional repayment of creditors using the funds derived from the liquidated assets.
What are the advantages of a pre pack administration?
The benefits of a pre-pack administration encompass:
- Streamlined Continuity: This approach enables the seamless transfer of the business or a portion thereof as an ongoing concern, ensuring operational flow remains undisturbed.
- Reputation Preservation: The company’s reputation and image remain more resilient, safeguarding the retention of jobs, suppliers, and customers, and minimizing disruptions.
- Immediate Completion: The sale concludes swiftly upon the administrator’s appointment, sidestepping potential losses that might arise during conventional administrations. This safeguards funds for creditors.
- Asset Value Retention: The pre-pack process effectively maintains the value of assets, a task that can prove challenging in the context of a regular administration.
What are the disadvantages of a pre pack administration?
he pre-pack administration process entails intricacies that come with several potential downsides:
- Stakeholder Implications: Some existing customers, suppliers, and creditors might experience financial setbacks once the business transitions to the newco.
- Lease Transfer Challenges: There could be resistance from your landlord to transfer the lease to the newco. It’s wise to have preliminary discussions (with or without the IP) to gauge the feasibility of such a transfer.
- Supplier Support Uncertainty: The newco’s success might hinge on continued support from key stakeholders like suppliers. Ensuring their commitment before embarking on a pre-pack administration is crucial to avoiding potential setbacks.
- Director’s Debt Concerns: Detractors of the pre-pack process contend that it can enable directors to evade the company’s debts, leaving creditors without payment. Nonetheless, companies typically opt for pre-pack administration only when they’re incapable of repaying those debts, making creditor non-payment likely in any case. Often, administration or liquidation remain the sole viable choices.
- Conflict of Interest: If you, as a company director, intend to purchase the business, careful consideration is required regarding your personal stance. Creating a newco to acquire the business might expose you to a conflict of interest.
The pre-appointment procedure
There are multiple pathways through which a company can enter administration. In most cases, this is achieved through a resolution by the board. This action facilitates the submission of a sworn document known as a “notice of intention to appointment of an administrator,” as outlined in Schedule B1 of the Insolvency Act 1986.
Should a pre-pack administration be pursued, the procedure is also governed by Statement of Insolvency Practice 16, commonly referred to as SIP 16, accessible here. A concise overview of SIP 16 stipulates that the business should undergo valuation, marketing, and subsequent pre-arranged sale before the administration process commences (the sale agreement is typically executed and agreed upon ahead of the administration’s commencement, and it is finalized either immediately or shortly after the administration takes effect).
The journey from the instruction of an insolvency practitioner (IP) to the conclusion of the administration unfolds as follows:
- IP Instruction: The insolvency practitioner is engaged.
- Agent Engagement: The IP appoints an agent to evaluate and market the business, a process that usually takes around 5 to 10 days.
- Sale Agreement: The sale is negotiated and sale agreements are drafted and concurred upon by the IP and the purchaser. The terms of the sale can involve full consideration upon completion or include a deferred element.
- Qualifying Floating Charge (QFC) Consideration: If a qualifying floating charge holder is present, they possess the authority to appoint an administrator of their choosing. However, they may opt to allow the directors to appoint an administrator. Open communication is crucial to keep the QFC holder informed throughout. The IP usually initiates contact to ensure they comprehend the strategy.
- Administration Commencement: The administration becomes effective and the sale is concluded. This usually transpires within 10 to 15 days from the IP’s instruction, although the duration can vary.
- Transfer of Assets: At this stage, the business and its assets shift to the purchaser. The company undergoing administration retains the sale consideration and any remaining assets to be realized. Following deduction of costs, the IP redistributes these funds to creditors, and subsequently, the company is dissolved.
Regarding fees, pre-appointment fees can be funded in advance by the company or financed from the funds generated during administration, subject to creditor endorsement through a ‘decision procedure.’ Essentially, creditors partake in a vote to determine the reasonableness of the fees. Post-appointment fees are also subject to creditor approval through voting.
Pre Pack Administration explained
Frequently asked questions
There are no specific legal restrictions on the use of pre-pack administration, but it must be conducted in accordance with the law and must represent a fair and reasonable outcome for the company's creditors. In addition, the sale of the company's assets must comply with the rules of the Insolvency Act 1986 and any other relevant legislation.
A Pre Pack Administration takes around 4-10 weeks overall, but the timescale depends on the complexity of each business' affairs. Are there any restrictions on the use of pre-pack administration?
How long does Pre Pack Administration take?
Conclusion
Pre-pack administration can be an excellent company rescue tool for businesses that are suffering from financial distress because it can help to preserve the value of the business and its assets. By completing the sale of the company’s assets quickly and efficiently, pre-pack administration can help to prevent the value of the business from deteriorating further, which can be particularly important in industries where market conditions can change rapidly.
In addition, by allowing the existing management team or other insiders to purchase the assets and continue running the business, pre-pack administration can help to maintain continuity and ensure that the business can continue to operate and generate revenue. This can be particularly beneficial for employees, who may be able to retain their jobs and avoid the disruption and uncertainty of a traditional administration. Ultimately, they can be an effective tool for returning struggling businesses to profitability, provided that it is conducted in accordance with the law and represents a fair and reasonable outcome for the company’s creditors.
If your business is suffering from a downturn and wonder how a pre pack administration can turn your business around simply complete the online enquire form and one of the team will make contact.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.