Frequently Asked Questions about Pre-pack Administrations
Why do pre-packs sometimes cause controversy?
Pre-pack administration involves quickly selling all or parts of a business in severe financial difficulty. The business can be sold to a third party or trade buyer, but the directors of the struggling company are also able to purchase the assets and start a new company.
This is where the controversy lies, and in the past, a lack of transparency has caused further concern. A pre-pack sale happens very quickly, and it may appear that the directors are trying to avoid their responsibilities to creditors.
In reality, however, the pre-pack admin process is strictly regulated. The appointed insolvency practitioner (IP) must be able to demonstrate that a pre-pack administration sale is the best course of action, and that business assets have been professionally valued.
Do the company’s directors choose the pre-pack route?
Company directors can choose to implement a pre-pack sale if their business is insolvent. The decision is usually made after receiving professional advice from a licensed insolvency practitioner (IP).
It is important for the directors to understand all their options, however, as pre-pack is not always the most suitable route. The licensed insolvency practitioner will assess the company’s situation and present any alternatives to the directors.
The IP must also be able to show that a pre-pack sale is the best option for creditors – that it offers a better return than liquidation, for example. If the directors choose pre-pack administration, they hold a board meeting and then pass a resolution regarding the sale.
What happens to intellectual property in a pre-pack?
Intellectual property is a key asset class in a business sale. A company’s intellectual property can include trademarks, patents, and copyright, as well as domain names and internal databases.
All elements of IP ownership need to be professionally valued to ensure their true worth is utilised in a pre-pack sale, however. The speed of this process can preserve the value of some intellectual property, as business disruption and negative publicity that normally surround an insolvent business is minimised.
Trademarks, in particular, closely represent a company’s brand and are often widely recognisable by consumers. When the company’s right to its trademark is fully registered, it becomes an important part of a pre-pack sale.
What’s the difference between pre-pack and normal administration?
The main difference between a pre-pack and a normal administration is that a pre-pack sale is negotiated and arranged before an administrator is appointed. In a pre-pack sale, a business can be sold to a trade buyer, third party, or the current directors.
The administrator carries out the sale quickly once appointed, which can preserve the value of assets and prevent bad publicity. During a normal administration, the office-holder places the business for sale on the open market after they take office.
The sale becomes public knowledge, which can damage the business’ reputation. This is why a quick sale under a pre-pack administration can be preferable in some cases.
How long does a pre-pack take?
A pre-pack administration is a very fast process because negotiations and marketing take place prior to appointing an administrator. The pre-pack sale can take around 4-10 weeks¹ overall, but the timescale depends on the complexity of each business’ affairs.
If the existing company directors, rather than a third party or trade buyer, purchase the underlying business assets using their personal funds, it can further speed up the process. When a company’s debt levels are increasing rapidly and it is under threat of creditor legal action, the speed of a pre-pack sale is particularly relevant, and can save the business from liquidation.