As with any type of insolvency process, it comes with pros and cons, and a pre-pack administration is no different
On one hand, pre-pack administrations can offer a swift resolution, potentially preserving jobs and allowing the business to continue trading with minimal disruption.
This method often yields a better return for secured creditors compared to other insolvency procedures. On the other hand, unsecured creditors might find themselves at a disadvantage, often recovering little to none of their outstanding amounts.
Moreover, the lack of transparency and potential conflicts of interest, especially when the business is sold to its existing directors or those closely connected, can raise concerns about the fairness and integrity of the process.
Advantages & Disadvantages of a Pre-Pack Administration
Prepack administration can have several advantages, such as the ability to quickly restructure a struggling company and preserve jobs. It allows the company to continue trading with minimal disruption, as the buyer and seller have already agreed on the terms of the sale before the administration.
Additionally, a pre-pack administration can be a more favorable outcome for creditors than liquidation, as it allows for a better return on their investments. Furthermore, it can be more cost-effective as the negotiations and due diligence process is done before the company goes into administration.
However, a pre-pack administration also has some disadvantages. The process can be criticized for its lack of transparency, as the negotiations and sale are done before the company goes into administration, and the details may not be disclosed to the public.
The process can also be perceived as unfair to unsecured creditors, as they may not have the same level of information or representation as the buyer during the negotiations.
Advantages of pre-pack administration
Pre-pack administration can be attractive for the business, its directors, and their creditors for various reasons. The main benefit is the speed at which assets can be sold, which often results in higher returns for creditors. But there are other benefits too:
- Business continuity
A break in trading can be extremely detrimental with loss of customers and sales impacting cash flow and putting jobs at risk. Pre-pack administration allows for a very quick transfer of business. This often means trading can continue uninterrupted because the business retains the same staff, can stay in the same premises and may even keep the same (or a similar) name.
- Job preservation for employees
Insolvency often requires cost-cutting and reduced trading operations, which in turn can result in job losses. Pre-pack administration can help avoid the need for redundancies, providing job security for employees.
- Reduced costs
The speed and efficiency of pre-pack administration makes it less costly than other administration procedures. Creditors can be paid quickly, and significant professional fees are also sometimes avoided.
- Brand image is maintained
There’s no denying that insolvency can have a negative impact on the reputation of a company. Pre-pack administration can mean a company avoids bad publicity, ensuring the positive image of the brand is maintained, helping to ensure the continued growth of the business.
- Your business can renegotiate or end certain contracts
When your business is transferred from the old company to the newco, you may be able to end certain contracts. Contracts for office or retail space, for example, might not be required by the new company and act as needless costs. Some of the contracts your company may be able to close in a pre-pack sale include property leases, service contracts with other companies, vehicle hire contracts and other contracts that aren’t necessary for your new company. Legally, your company can end many of these contracts in order to reduce costs for the new company. This makes running your business less financially taxing in the future and removes unnecessary financial burdens from the new company.
- Reduced costs of administration
Due to the speed of a pre-pack administration, the costs involved are often less than if a standard administration procedure had been chosen. Due diligence is carried out before the company’s financial problems become apparent, which helps to reduce costs.
- Directors maintain an element of control
Unlike other insolvency procedures where an administrator takes full control, a pre-pack administration affords the directors some control over their business. They can choose to sell the company to people already familiar with the industry, or even buy it back themselves. The option of the latter is very appealing to some directors, especially if the business simply went through an unexpected set-back rather than suffered because of poor management. Being able to learn from past mistakes and move forward increases the business’ chance of success.
Disadvantages of pre-pack administration
While pre-pack administration is often a positive experience, there are some disadvantages to going down this route:
- There is still an investigation
After business assets have been sold, the old company may need to be liquidated. Part of this process includes the liquidator compiling a report for the Department of Business, Innovation & Skills. The conduct of the directors leading up to the insolvency is investigated, and if deemed to be improper or fraudulent, they will face prosecution.
- Staff are still retained under TUPE rules
Employees may still be protected under the TUPE regulations in administration. This means that redundancies and other cost cutting processes may not be possible. TUPE can be extremely difficult to navigate, so consulting a professional is always advised.
- It can be viewed as unethical
Pre-pack administrations can be viewed as unethical. This perception can make some areas of business (such as renegotiating supplier contracts) tricky. However, pre-pack administration is widely used in the UK and is governed by strict regulations.
One of the jobs of the administrator is to ensure assets are not undervalued, since the goal of selling the business is to pay back creditors. If the directors decide to buy back their company, they will likely need to find a significant amount of money, and it may take some time to gather the funds.
Read more: Are pre pack administrations legal?
Pre-pack administration can be a useful tool for companies facing financial difficulties, as it allows them to quickly and efficiently restructure their business and preserve jobs. Additionally, it can provide a better return for creditors than liquidation. However, there are also some potential downsides to the process, such as concerns about transparency, fairness, and conflicts of interest.
It’s important to weigh the pros and cons carefully before deciding to pursue a pre-pack administration and to ensure that the process is carried out in a transparent and fair manner. It’s also important to consider that every case is different and the decision should be made based on the specific circumstances of the company.
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.