Pre-pack administration is a formal insolvency process which involves the sale of a business, or its assets, to a connected or unconnected buyer. The sale to the new company completes as soon as the formal appointment of the insolvency practitioner is made, and the old company, along with any remaining liabilities, will be liquidated shortly afterwards.
Pre-pack administration is a formal insolvency rescue process which involves the sale of a business, or its assets, to a buyer. With a pre-pack administration process, the sale is often to the company's current directors operating via a new company – or ‘newco’.
Pre-pack administration – also known as pre-packaged administration – differs from a conventional administration process as the sale is negotiated and agreed to prior to the insolvency practitioner being formally appointed. The sale of the business and/or its assets to the new company completes as soon as, or very shortly after, the formal appointment of the administrator is made.
In order to enter into pre-pack administration, the company must be insolvent and a licensed insolvency practitioner (IP) must be appointed to act as administrator. With a pre-pack, this appointment only takes place after the sale has been agreed.
The aim of a pre-pack is not to save the insolvent company itself, but to rescue viable elements of the business allowing trade to continue from a new company without the burden of the existing unmanageable debt. This can help ensure continuous employment for employees as well as minimising the loss to creditors when compared to the company entering liquidation without first being placed into administration.
The company is facing creditor pressure – If you are dealing with hostile creditor pressure and the business is facing the possibility of an undesirable outcome such as a winding up petition or liquidation, steps need to be taken quickly if you want to save the company from closure. If your company is currently insolvent but you are continuing to trade, be aware that the directors could be held personally liable if appropriate action is not taken to rectify the situation. You are strongly advised to contact a licensed insolvency practice for advice and direction.
An initial consultation held to examine options – You can arrange an initial consultation with one of our qualified licensed insolvency practitioners where you will be able to discuss the situation in confidence allowing the insolvency practitioner to make a suitable recommendation. We will analyse your company’s operations, assets, and outstanding debts, and assess whether pre-pack administration is appropriate. In determining the most appropriate course of action, an insolvency practitioner must consider the position of outstanding creditors and ensure the chosen process maximises their returns as much as possible.
Asset valuations sought and a Statement of Affairs produced - If pre-pack administration is suitable and you choose to appoint one of our IPs to act as the administrator, they will begin the process by determining the value of your company’s assets, and creating a Statement of Affairs (SOA) which will be contained in the official administrator’s proposal. This document will also contain a proposal to the company’s outstanding creditors detailing the expected outcome, along with projections of the administrator’s anticipated costs. The existing company must be marketed for sale, and the administrator is obliged to listen to all genuine offers even those from competitors.
Administrator is appointed and sale completes – Once the insolvency practitioner is appointed to act as administrator, the old company enters administration, and the agreed sale of the assets to the newco completes.
Creditors’ meeting held - After the sale of assets is complete the administrator holds a meeting with the insolvent company’s creditors to give a thorough explanation of why the pre-pack administration was undertaken as mandated under SIP 16 Disclosure Requirements.
Liquidation of the old company is considered - While the newco is by this stage up and running, the old company still exists. A company cannot stay in administration indefinitely, nor can the administrator distribute any funds back to the creditors whilst the company is in administration meaning an exit route for the company needs to be planned. Stripped of most of its assets yet still carrying high levels of debt, in most cases the administrator will recommend that the old company be liquidated. This is often proposed during the creditors’ meeting. If the creditors consent to this then the old company undergoes a Creditors’ Voluntary Liquidation (CVL), during which the rest of its assets are liquidated to repay as many of the remaining debts as possible as per the hierarchy of creditors.
What happens to company assets in pre-pack administration?
During company administration, the desirable assets of the business are sold to the purchasing party. These assets could include stock, property, goodwill and work in progress. Prior to the sale all assets must be independently valued and the buyer must pay a fair market price.
Not all assets need to be purchased by the newco as part of the pre-pack process. Any assets not purchased will remain with the old company along with its liabilities, and these will form part of the eventual liquidation of the insolvent company.
Pros and cons of pre-pack administration
As with most formal insolvency procedures, there are both advantages and disadvantages to pre-pack administration. Whether pre-pack administration is a suitable option for your company will depend on a number of factors including its future viability, current debt levels, and the shareholders appetite to continue trading. A licensed insolvency practitioner will be able to talk you through your options depending on your own unique circumstances, but some of the main pros and cons are as follows:
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Speed of sale - Pre-pack administration allows for a quick sale and a seamless transfer of the purchased assets, allowing business and trade to continue largely uninterrupted. This speed of sale has a number of benefits including helping to preserve asset values, save jobs, and maintain commercial momentum via largely uninterrupted customer service and continuation of supplier contracts.
Preserve value - Once word gets out that a company is in financial difficulty, the value of the business typically takes a sharp decline as customer, supplier, and employee confidence is lost. As a pre-pack sale is completed before the company enters administration, this risk of falling value is severely mitigated.
Save jobs - When a company finds itself in an insolvent position, having to make staff redundant is always a risk. As a pre-pack allows for uninterrupted continuation of trade, this often means continued employment for its staff. Employee rights are protected by TUPE (The Transfer of Undertakings Redundancy (Protection of Employment)) regulations which transfers employee contracts over to the newco. Redundancy is unavoidable in some instances, however, pre-pack administration will typically result in many employees keeping their jobs when compared to alternative insolvency solutions.
Better returns to creditors – Due to the speed of sale and the ability to continue to trade, the preservation of asset value can result in a better return to creditors than if the company entered into liquidation and its assets were sold on a distressed basis. The reduction in job losses is also a benefit to the general body of creditors as the value of preferential claims are kept to a minimum.
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Disadvantages of pre-pack administration
While pre-pack administration can be a great option in the right circumstances, there are a number of drawbacks to the process which also need to be considered. These include:
Finance and funding - When buying the assets of an insolvent company through a pre-pack administration there needs to be funding in place to facilitate this sale. This may have to be accomplished by using the personal funds of the directors or other shareholders if outside finance is difficult to obtain. To combat this potential sticking point, the administrator may be willing to offer payment terms to the purchaser allowing the assets to be paid for over a period of time.
Creditor concerns - As unsecured creditors will typically not be aware that the company has undergone a pre-pack process until the sale has completed, they may feel hard done by or concerned whether this was the best route for the company and its creditors. Following the pre-pack sale, administrators are required to provide substantial information to creditors about the sales process including details of the marketing activities undertaken and the asset valuations obtained in an attempt to alleviate these concerns.
Potential reputational damage – Due to the seamless transition from seller to buyer, some directors may think that the transition to a new company via a pre-pack will ‘fly under the radar.’ This is not the case and although pre-packs are often done with the best intentions of shareholders, employees, and creditors in mind, there is always the possibility that pre-pack administration will attract unfavourable attention particularly from creditors who are left unpaid.
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Licensed insolvency practitioners and their role in pre-pack administration
A company cannot enter administration – whether pre-pack or standard administration – without the guidance of a licensed insolvency practitioner. It is the insolvency practitioner’s responsibility to ensure that pre-pack administration is suitable for the company and that it represents the best possible chance of maximising creditor returns.
Before the insolvency practitioner is appointed, they will work to negotiate the pre-pack deal, which includes arranging valuations and negotiating with potential purchasers to ensure a fair deal is reached.
The administrator has a legal duty to the creditors, and as part of this, they are obliged to demonstrate that pre-pack offers the best returns for the company’s creditors. A pre-pack administration could be considered unlawful if the following criteria are not met:
The directors of the insolvent company and the administrator must be able to demonstrate that all other options were considered before the pre-pack administration route was chosen. They must be able to explain why a pre-pack was the most appropriate course of action available in the circumstances and its statutory purpose e.g. achieving a better return for creditors, must be clearly stated.
The administrator has to act in the best interest of all creditors, so it is vital there is justification to show that this was done. Details of any valuations obtained for the business and its assets must be noted and a record kept of any offers which were made by other parties and the reasons why these offers were rejected in favour of the sale to the directors of the insolvent company.
The administrator must thoroughly document the details of the pre-pack sale, including any marketing done, and be prepared to provide evidence of this when requested.
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Pre-pack administration regulation
As many pre-pack sales are to the shareholders of the original company, insolvency regulation surrounding disposals to connected parties will need to be adhered to. A connected party is defined as “a person with any connection to the directors, shareholders or secured creditors of the company or their associates”.
In order to help improve the transparency of pre-pack administrations, two processes have been introduced to provide creditors with reassurance that the sale was completed fairly. These processes are the pre-pack pool, and the evaluator’s report. Both aim to introduce a third party to offer an independent opinion on the sale when this was to a connected purchaser such as the shareholders of the original company.
The Pre-Pack Pool
The pre-pack pool is an independent body comprised of experienced business people tasked with scrutinising the circumstances of a connected party pre-pack sale and offering an opinion as to whether the proposed pre-pack represents a reasonable option.
Although valuable as an independent viewpoint, the pool member did not have the power to affect the sale. Referral to the pre-pack pool was voluntary and take up was low; due to this, new regulations came into force in April 2021, making obtaining a Qualifying Evaluator’s Report compulsory.
Qualifying Evaluator’s Report
Obtaining a Qualifying Evaluator’s Report prior to the sale of a business or its assets to a connected person within 8 weeks of entering administration was made compulsory in April 2021. The only exception to this is if the administrator has obtained creditor approval for the sale. It is the responsibility of the purchaser to obtain the qualifying report, not the job of the administrator.
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Find out more about Pre-Pack Administration
Pre-pack administration is a highly complex area and you are strongly advised to contact a licensed insolvency practitioner at the earliest available opportunity. Not only will this let you explore alternative solutions which may be more appropriate, but will also ensure the process is started before a creditor can petition for your company to be wound up.
Real Business Rescue’s team of licensed insolvency practitioners can provide the expert help and advice you need on the full range of formal insolvency processes, allowing you to make the best decision for you, your company, and its creditors. Call today on 0800 644 6080 to arrange a free no-obligation consultation.
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.
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