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Keith Tully

Written by Keith Tully


A pre-packaged administration sale, also referred to as a pre-pack administration or just “pre-pack,” is the pre-arranged sale of an insolvent company's assets to a third-party (sometimes the company's own directors) upon the commencement of company administration. 

Keith Tully - Managing Director

Keith Tully
Partner

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The main benefit from the perspective of the insolvent company is that the directors can have the opportunity to purchase some of the company's assets before it goes out of business, and then legally transfer those assets to a newly formed company (commonly referred to as a “newco”) which will carry with the working progress, assets, staff, customers in a seemless manner.  

It is a formal insolvency procedure that is often used to preserve the value of the assets of the company rather than it simply going out of business.  The pre pack process has  saved thousands of jobs every year.

 or if you have a specific question feel free to call us on 0800 644 6080 or email us. 


 

When Can a Company Use Pre-Packaged Administration? 

The following are the basic prerequisites that must be met in order for an insolvency practitioner to be able to legally recommend and facilitate a pre-packaged administration sale:   

  • The business must be insolvent and have no viable prospect of recovery. In short, a business is considered to be legally insolvent when the amount it owes in current and contingent debts and liabilities exceeds the combined value of its assets, and/or when the business has defaulted on a debt of more than £750 and has failed to comply with a statutory payment demand.
     
  • The insolvency practitioner and company directors must be able to show that no other solutions would have been more beneficial to creditors. Company directors and insolvency practitioners are required by law to act in the best interest of the insolvent company's creditors. Therefore, a pre-pack administration cannot be used unless it results in the best outcome for creditors.
     
  • The purchaser must be able to pay fair market value for the assets out of their own personal funds. This is what makes a pre-pack ethical -  the proceeds from the sale of assets are distributed amongst creditors, so it is essentially the same is if an unrelated third-party purchased the assets during liquidation, except the third-party can be one or more directors of the insolvent company.  

 

The Main Benefits of a Pre-Pack Administration

  • Retaining the Assets of a Failing Business – Instead of going out of business and losing all clients, employees, contracts, equipment, inventory, property, and other assets, the company's directors can buy some or all of the assets and transfer them to a new company. This is a huge relief to most business owners and directors as they've worked hard to accumulate the value that the business has, and it is certainly a refreshing surprise to learn that it may be possible to save some of that from being lost.
     
  • Uninterrupted Business Operations – Because of the fact that the assets, work in progress and staff transfer over to a new limited company in one day without ceasing operation at all it is not uncommon for the pre packaged administration to provide uninterrupted service to its suppliers and general public.
     

 

Considering TUPE Regulations and Directors' Duties During a Pre-Pack 

Transfer of Undertakings (Protection of Employment) – TUPE regulations protect employees from losing their jobs during the insolvency procedures. Unfortunately, during a pre-pack some employees may need to be let go when the company is sold and this is not always an easy thing to do. Not only is it difficult to choose which employees should be made redundant, but there are also laws which need to be adhered to.

The main purpose behind these regulations is for the protection of employees working for a business that changes ownership. TUPE regulates how employees are moved over to a new employer along with any liabilities which may be associated with those positions. Although these specific regulations do, in fact, deal with other aspects such as outsourcing and taking over licenses and leases, the main area which can result in major penalties is in the context of how employees are dealt with during a change of ownership. In a pre-pack employees contracts are usually transferred to the purchasing company along with any existing contracts and accreditations as part of the sale.  

 

Controversy Surrounding Pre-Pack Administration 

A pre-pack administration is typically used to allow an alternative party to purchase some of the assets of the company before it is wound up. The purchased assets are transferred to a “newco”, which could then go on operating without being burdened by the debts and liabilities of the old company. Some see this as a way for the directors of indebted companies to get away with not paying their debts and continuing business as usual, which is why there has been some recent controversy surrounding pre-pack administration in the press.

A consultation on reform was undertaken but it was ultimately decided that no amendment was needed, so pre-packs are still a perfectly legal and ethical solution when no other recovery options are viable. After all, if the pre-pack was not carried out, then the insolvent company would have gone out of business anyway and the creditors would have recovered less of the money owed to them. Furthermore, since TUPE does apply during a pre-pack this procedure is actually economically beneficial because it preserves jobs.  


Avoiding Accusations of Misconduct
 

It is imperative as soon as possible to seek the guidance of a licensed IP  if your companty is insolvent. If a company is insolvent and continues to trade, the directors run the risk being accused of wrongful or fraudulent trading. This can result in a directors disqualification that lasts for a period of 2 to 15 years. In addition, the directors could be held personally liable for some of the insolvent company's debts, and could even face imprisonment if evidence of fraudulent activity is found.  

Reiterating What Is Being Sold 

When undergoing pre pack administration, one of the greatest misunderstandings is in exactly what is being sold. It should be understood from the outset that the business and assets are up for sale but not the existing limited company itself. Real Business Rescue's Help & Advice Service will help to clarify the issue for both the current and new owners. When the pre-pack administration is complete, the company will still be trading probably with most of its current clients, suppliers and perhaps many of the same employees, but it will be a totally new company with a new name and new owners.

Everything that is being sold will be specified in the sale and purchase agreement, it is recommended that the company buying the assets uses their own solicitor to advise them on the agreement.

 
If you need help determining whether a pre-packaged administration could be the solution to your insolvency problems, or if you have any questions at all feel free to email us or call us on 0800 644 6080. 

 If you'd like to learn more visit our pre-pack administration FAQs or download our free pre-pack guide. 


Keith Tully

Author
Keith Tully
Partner

Keith has been involved in Business Rescue since 1992, during which time he’s worked for both independent and national firms. His specialties include company restructuring matters and negotiating with HMRC on his clients behalf.

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