Pre Pack Administration

Pre pack administration is an insolvency procedure where a deal is stuck to sell the assts of the business before appointing administrators to facilitate the sale. It’s a powerful, legal way of selling the business on to a trade buyer or third party.

Alternatively, the existing directors can buy the assets of the old company by  operating under a new company (‘newco’). This is usually done if the business is facing serious problems and creditor threats

Newco will need to be viable and have funding in place so it can buy the assets of the old company (‘oldco’) at fair value.

If the company is under threat of a winding up petition it can be a useful restituting tool until a solution if found. However, pre pack administration is not permitted after a petition has been issued.

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What is Administration

An Administration is an insolvency process which is predominately designed to provide a breathing space from creditor actions.  The law and procedure relating to Administrations and more importantly the procedure to place a company into Administration is set out at Schedule B1 of The Insolvency Act 1986.

It is incredibly quick and easy for company directors to place a company into Administration, particularly if there are no Floating Charge creditors. The company can be placed into Administration within a matter of hours.  It is a simple matter of filling out a few forms, these forms need to be sworn at a solicitors office.  Those sworn forms are then filed in court and the company will then be in Administration.  The forms are merely stamped by the Court Clerk and given a reference number and therefore there is no need to see a Judge.

What is a pre-pack administration or administration pre-pack sale?

A pre packaged administration is a popular method of rescuing a business. Pre-pack administration are governed by practice requirements, the main difference with a pre pack is that the sale of the business and any assets of the company is negotiated before the appointment of administrators and completes either immediately upon or at least shortly following the appointment of the administrator. Another major difference to the standard process is where the administrators market the sale of the business once their appointment has commenced and secured, allowing them to market the business after their appointment

Administration process

When a company goes into administration, the administrator will aim to rescue the company in order to get the best possible result for the creditors. They may also realise any assets or company property which will be used to pay secured and prioritised creditors.

The administrator has 8 weeks to manage the process and send out a proposal to the creditors on the plan of action to pay back debts and manage the administration. This will outline how they will try to get the best outcome for creditors.

The administration process can go on for up to a year, depending on the nature of the situation. When considering payments to creditors there is a general order of priority during the administration process.

  1. Secured creditors
  2. Preferential creditors
  3. Unsecured creditors
  4. Shareholders

The administration process normally ends automatically after the 1-year period is up. During this time, the company may have been rescued, in which case it can be passed back to the directors. If the administration was unsuccessful then the company may go into liquidation or have been dissolved if secured and/or preferential creditors have been paid, but none of the other creditors.

Insolvency law requires that any finance provider such as a bank or lender who holds the appropriate security, is contacted, this is to explain the aims of the administration and request approved.

In order to hold security the finance provider must have a fixed and floating charge, this is usually a debenture,  the charge holder will need to give permission for the process to go ahead.

The lender must be given five days clear notice.  A secured lender can still appoint administrators over a company without notice if it thinks its money is at risk. This is why communication with the secured lender is essential.