Updated: 7th November 2020
Under the Insolvency Act of 1986 and the Statement of Insolvency Practice (SIP) 16 guidelines, Insolvency Practitioners acting as administrators are obligated to maximise the interests of the distressed company’s creditors. This means that pre-pack administration can only be a feasible option for your company if it is also in the best interest of its creditors. Other options that an insolvency practitioner is required to consider before facilitating a pre-pack administration include company voluntary arrangement (CVA), refinancing, and creditors’ voluntary liquidation (CVL). If all of these options have been ruled out and your company meets the following criteria, pre-pack administration may be your best option.
We understand that the last people you would ever want to speak to would be a business rescue firm, but we also know that trying to understand your options can be equally challenging. We have seen every eventuality in business and can help clarify what your options are..
Maybe your Company is just starting to take off, and there is finally light at the end of the tunnel, but you still don’t have the excess capital needed to repay creditors. The company has the potential for growth, but because it is unable to obtain funding and escape the vicious cycle of debt it simply can’t progress.
Any attempt to refinance would consume too much revenue, and your creditors have refused to agree to viable deferred payment terms. A company voluntary arrangement (CVA) might work, but even the reduced demands that such an agreement could grant still would be too burdensome to allow for full recovery and a transition into expansion.
If this sounds like your company, pre-pack administration may be a suitable option. This procedure would allow your company to continue operating as usual while some or all of the assets are sold to another company. The proceeds could then be used to pay off secured creditors, thereby helping you avoid the consequences of defaulting on a secured debt (i.e. – bankruptcy or property loss).
Once you’ve established that a pre-pack administration would provide an ideal outcome for both your business and its creditors, it’s time to determine whether your assets are valuable enough to repay secured debts. If they’re not then the debts will not be able to be dissolved through the procedure and a secured creditor could still exercise a legal charge against your company’s property or force you into receivership (during which all control of your company’s assets would be seized by a creditor-appointed receiver). If valuation shows that your assets have enough worth to repay all secured creditors after administration, pre-pack may be a viable option.
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The main concern that many people have about a pre-pack sale is that it does not take into consideration the debts of unsecured creditors. In fact, the process usually results in the unsecured creditors taking losses because the company is usually liquidated after the assets have been transferred to a new corporation, thereby allowing the directors to escape personal liability and leaving no one responsible for repaying the unsecured debts. Thus, in order for a pre-pack administration to be lawful you must be able to show that you had no way of repaying unsecured creditors going into the procedure. In other words, a pre-pack sale is only a viable option for insolvent companies that were already going to go out of business without repaying debts. Since the unsecured creditors would have inevitably taken a loss whether the pre-pack was undertaken or not, it can be shown in court that the pre-pack procedure offered the most beneficial outcome for creditors as a whole because it at least allowed the secured creditors to be repaid in full.
Instead of selling your company’s assets to a third-party, a pre-pack sale could allow your directors to purchase the assets and transfer them to a newly formed company, which would then pick up where the insolvent company left off. This type of pre-pack administration procedure is often referred to as phoenixing, because the new “phoenix” company arises from the ashes of the old company, like the mythical firebird. If your directors are competent enough to launch a new business, and have the capital needed to fund the acquisition of assets, a phoenixing pre-pack procedure may work.
The only way to know for sure whether pre-pack administration is the best option for your company is to contact a qualified insolvency firm and participate in a free consultation. After assessing your situation and reviewing the necessary information an insolvency practitioner will be able to recommend a suitable course of action and give you an estimate of how much it will cost and how long it will take to facilitate the recovery of optimal business operations.