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The Disadvantages of a Pre Pack Administration in Insolvency

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We understand that the last people you would ever want to speak to would be a business rescue firm, but I 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.
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There are obvious advantages to a pre pack such as continuation of business, employees keeping their jobs and avoiding a winding up petition/order. However, there are a few disadvantages which you should be aware of before deciding to enter into a Pre Pack Administration. Here are potential pitfalls which you may encounter if you are considering purchasing the assets through a new company.

Perception of Abuse

The first thought which crosses many people’s minds is that the new company was established to abuse the system – that is for the old company to get out of paying its debts. Whilst many debts are ultimately written off in the administration, this may not bode well in terms of public relations. New clients may be unwilling to deal with the new company and creditors may limit future credit exposure or they may refuse credit altogether. Although this may not be your intention  to avoid paying creditors, it may be perceived as an abuse or an easy way out.

Perceived Confidentiality or Secrecy

Another misconception which many business owners or directors have is that the transition to a new company will ‘fly under the radar.’ This is not the case and may actually work against the new company. There is always the possibility that Pre Pack Administration will attract unfavourable attention.

TUPE Responsibilities Will Carry Over to the New Owner

The 2006 regulations entitled “Transfer of Undertakings (Protection of Employment)” or TUPE, mandate that there are certain rules which must be complied with when transferring a business to a new entity. Although your intentions may be good and ethical when expecting your employees to be able to keep their jobs, the new owner may view this in a whole other light.  This means that the purchasing company does attract a liability from day one for the staff.

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If the business is going to be essentially the same except under new owners, TUPE will be a major consideration.
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If customers, work in progress, debtor book etc.. have been transferred as part of the sale and if the business activities will be similar (if not the same!) then TUPE will definitely apply.

Time Is Ticking Whilst Negotiations Take Place

One of the main advantages to a Pre pack Administration is that business can continue on uninterrupted whilst negotiations take place. This can be a good thing but here too, it can work against you as well. Pre Pack Administration implies that an insolvent company 's assets are being sold to avoid winding up and if financing takes longer than expected, those invoices keep accruing. Creditors may not be willing to extend credit to the new owners because they lost a sizeable amount of money. Future credit may not be an issue, but it very well could be as mentioned above.

Finance and Funding a Pre Pack Administration

Another advantage when buying the assets of the company through a Pre Pack Administration is that the IP and his agents can offer payment terms to the purchaser who can pay for them over a period of time. If funding is required Real Business Rescue has contacts who make it their job to find finance and funding for SMEs in the UK.

The Conduct of Directors Will Be Investigated

As part of the administration process which takes place after the sale is finalised, the Administrator is required to submit a report on the conduct of the directors of the old company. HMRC is especially keen to view this report because they may not allow for a VAT registration what conditions such as payment of a bond if the director-turned-new-owner had a history of non-payment of taxes. A large security may be warranted before the new company can do business. As well, wrongful trading penalties may still be assessed retrospectively to previous directors who are the new owners.

These are a few of the Pre Pack Administration disadvantages which may be encountered, but in reality, there are more advantages than disadvantages if the sale is handled properly. Real Business Rescue can administer the process, handle the negotiations and offer advice throughout the entire process. If your company is in financial distress and you would like to pursue Pre Pack Administration, contact our team of highly qualified business rescue insolvency practitioners for more information.

New companies do well with proper guidance and restructuring, but it is imperative to have a well thought out plan before entering into a pre pack. Contact Real Business Rescue to discuss whether or not a phoenix is right for your company.

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