What is a pre-pack administration?

Pre-pack administration is when a company becomes insolvent and attempts to sell off their assets before selling the business. This happens before an insolvency practitioner is appointed. The sale is completed either when the appointment starts, or straight afterwards.

A pre-pack is very different from the normal company administration process, where an administrator is always appointed first. The administrator works to try and rescue the business. But if that fails, then the company is sold.

Why pre pack administration?

When a company cannot pay its creditors, it can be put under pressure to pay or be forced to go into liquidation. In this instance, the business can contact a licensed insolvency practitioner to help them go over their options that may help them or help to pay the creditors.

If the business assets are worth enough to pay off the creditors a pre pack administration could be the best choice.

Entering a pre pack administration process can result in paying off as many creditors as the business can and in minimising any loss of trade. A pre pack sale is usually arranged quickly for the best possible outcome for both parties.

What is pre-pack administration
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The pre pack administration process

  • Asset valuation

Before a business can be put on the market, a professional valuation of the business and its assets will take place. Administrators will also create and outline a Statement of Affairs which is placed in an official administration proposal. This proposal will also outline to creditors the expected outcome and costs.

The company is then put on the market and third parties can enter the bidding process. At this time, all information about the pre pack administration deal is highly confidential so interested parties need to sign confidentiality agreements. All genuine offers are listened to, even those from competitors.

For each offer, the insolvency practitioner takes steps to ensure the buyer has enough funds to cover the sale. Therefore, cashflow statements, profit and loss forecasts and balance sheets are normally requested as evidence.

  • The administrator is then appointed

The administration proposal is sent to court and once this is received the insolvency practitioner can be appointed as the official administrator. At this point, the company is given an eight-week breathing period and is protected against any other action from creditors.

An official price is agreed for the assets and the business, which is then sold and legally transferred to the new business.

  • The creditors’ meeting

Once the business and its assets are sold the insolvency practitioner will hold a meeting with the creditors to give them a clear understanding of the pre-pack administration and why it was undertaken. During this meeting the administrator is legally obligated to share certain information under the SIP 16 Disclosure Requirements.

This will include information such as whether or not the administrator was involved with the company prior to appointment, details of how the assets were valued, the amount of each sale and details who bought the assets.

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Pre pack administration disadvantages

  • Common perceptions

Pre-pack administration can have a negative impact on both the old and new businesses. As most of the debts are written off, leaving creditors unpaid or partially paid, there is a perception that directors just walk away from their debts.

In reality there are other options such as liquidation or administration, which could leave the creditors in the same position. Although it doesn’t look great in public relations and can affect reputation, a pre pack administration must be conducted in-line with both the creditors and the company’s best interests.

Despite this requirement, a pre-pack can impact customers, suppliers and creditors financially. This could lead to future credit restrictions or loss of existing and new clients.

  • Pre pack administration employee rights

During the sale of a business within the pre-pack administration process employee rights are normally transferred to the new party. This can cause uncertainty surrounding the retention of their job. The new employer could either make them redundant or maintain their employee rights.

If they keep their job, but don’t want to move over to the new company, they may lose their rights to receive redundancy pay.

  • Investigation of directors

During pre-pack administration the business conduct of the directors is investigated. This can be a stressful process for those involved and could lead to identification of wrongful trading or fraudulent claims.

Pre pack administration advantages

  • For the benefit of both parties

Although pre-pack administration isn’t always the ideal outcome, and there are some negative sides to the process, it is chosen if it is the most beneficial impact for both the creditors and the business itself.

Due to the fact that the sale is made quickly, it normally has little impact on the business operations which can continue to run. This also preserves the value of the company assets and protects against any loss of trade, meaning there is more money available to pay creditors and rescue the business.

  • Choose the most appropriate buyer

Pre-pack administration also allows the insolvency practitioner to choose the most appropriate buyer. Any genuine bidder will need to demonstrate that they have the necessary funds to cover the costs of the assets and the business.

Each bidder is credit checked and needs to provide statements of accounts to show this. Therefore, it’s not just the highest bidder that is chosen, but a third party that is capable of rescuing the business. This gives the business a much better chance of survival, protecting creditors, suppliers and employees.

  • Business reputation

If a sale is made quickly and there is little disruption to the business, then business reputation can have little compromise and jobs can be saved. Suppliers and creditors are more likely to be paid under new ownership, so any future issues can be rectified by demonstrating good business.

The content of this article was correct at time of publication.

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