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What happens to company assets during Pre-Pack Administration?
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Pre-pack administration and company assets
Company assets are sold to the purchasing newco in a pre-pack administration, with proceeds being used to repay outstanding creditors as far as possible. Purchased assets are then used by the newco to allow for trade to continue uninterrupted.
A pre-pack administration is a planned insolvency procedure in which the assets and business of a company are sold by the administrator to a pre-designated purchaser on or soon after their appointment. The proceeds of the sale are used to repay secured creditors in order to prevent them from exercising fixed charges, and to protect the company from bankruptcy. The company can continue operating uninterrupted as their assets are sold and transferred, making it possible to preserve brand integrity and retain clients/employees.
According to UK law, a company does not need the approval of its unsecured creditors or the permission of the court to initiate a pre-pack administration procedure. However, a licensed Insolvency practitioner must be appointed as the administrator. In a pre-pack sale it is possible for the insolvent company’s directors to purchase the assets/business and use them in a new company. The newly formed corporation is commonly called a "newco".
Although pre pack administration has been the subject of some controversy in recent years, as long as the administrator acts fairly and in accordance with Statement of Insolvency Practice (SIP) 16 guidelines pre-pack administration is a very legitimate and effective way to avoid companies completely closing down and continue company operations during insolvency.
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In a pre-pack administration the sale of a company’s assets/business are pre-negotiated with a purchaser before an administrator is appointed and the sale is executed by the administrator as soon as appointed. In a regular administration, the administrator begins managing and trading the business and conducting sales negotiations after being appointed, so the process is slower and less predictable.
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An insolvency practitioner is required by law to ensure that a pre-pack sale provides the best outcome for creditors before recommending this course of action, in most cases it is the most ideal solution for all parties. By streamlining the administration process prior to appointment a pre-pack sale offers the following benefits:
- Since the administration process is well-planned and pre-negotiated the company can ensure that business operations are not interrupted or detrimentally affected.
- Directors and employees get to keep their jobs.
- Once the pre-pack sale has been arranged, a purchase contract has been drawn up, and an Insolvency practitioner has been appointed as an administrator, the Courts keep the company protected from creditor pressure while the company’s assets are sold.
- Prevents secured creditors from enforcing a charge against the company’s property or assets – allows the distressed company to avoid receivership and bankruptcy.
- Can reduce operating costs.
- Costs less than typical administration because the administrator does not need additional funding to facilitate the sale of assets.
- All preliminary work, including marketing the business, valuation, and creditor negotiations, can be completed in just a few days if necessary.
- Assets can be sold at a higher price since the distressed company has the opportunity to plan in advance and negotiate with potential buyers whilst in site.
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The first step in organising a pre-pack sale is assessing the value of the distressed company’s assets and determining how much the assets can be sold for. Then the soon-to-be appointed administrator can begin searching for potential purchasers and marketing the company’s assets in an attempt to receive the highest price possible.
If current directors wish to buy the assets then it will be necessary for the directors to seek independent advice on setting up a new company. In addition, the purchasing directors will have to fund the acquisition of the company’s assets in order to become the new owners. Payments however can be deferred.
Once a suitable sales agreement is made the insolvency practitioner solicitors draws up an official contract of purchase and presents it to the court. The court then orders that the creditors allow the insolvent company to complete the administration process in order to recover debts, thereby protecting the company from further pressures.
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