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Pre-Pack Administration is a formal insolvency procedure where your company has arranged to sell some or all of its assets before going into Administration.
This is different from standard Administration, because the sale of assets has been negotiated before an administrator is appointed (whereas normally an administrator would market the business and find potential buyers).
Pre-Pack Administration often involves selling the business and assets to its current directors. They, often form a new company, or ‘newco’ to trade from. The new company must therefore have a finance channel in place in order to fund such purchases. In some instances the assets, work in progress, and debtor book can be paid for over a period of time, allowing the new company time to get on its feet and generate income – although it probably needs some funding to help.
If you are dealing with creditor pressures and your business is facing an undesirable outcome (such as a winding-up petition or voluntary liquidation) steps need to be taken quickly if you want to rectify the situation.
If your company is currently insolvent but you are continuing to trade, be aware that the directors could be held personally liable if the appropriate action is not taken to rectify the situation. You are strongly advised to contact a qualified insolvency practice for advice and direction.
Pre-Pack Administration is only feasible if its in the best interest of your creditors.
You can arrange an initial consultation with one of our qualified licensed insolvency practitioners. Together, we can discuss your situation in confidence so we can find the best solution.
We will analyse your company’s operations, assets, and outstanding debts – and also whether this option benefits your creditors. From here, we can assess whether pre-pack administration is the best course of action. If it’s not, we may recommend another solution like a Company Voluntary Arrangement (CVA), voluntary liquidation, or standard administration.
If Pre-Pack Administration is suitable, we will create a Statement of Affairs (SOA). This document will detail the expected outcome, projections of Administrative costs, and that the company is marketed for sale.
Once the court receives this, a “freeze” or moratorium is put in place. This means, all legal actions are paused and your company is now protected from floating legal charges. When a purchase price has been agreed, the assets are sold and legally transferred to the newco.
The newco is officially up and running, but 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. Therefore an exit strategy must be created in the form of a CVA or CVL. This means the final assets are liquidated, remaining debts are paid as much as possible, and the old company can officially close down.
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.
As a widely employed solution to company insolvency in the UK, a Pre-Pack Administration has a number of benefits that are completely unique to this turnaround procedure. There are strict regulations in place to make sure that everything is within the confines of the law. In effect, the old company is being sold to a new owner or owners so that it can continue on with business. The details of every sale are monitored and scrutinised by regulatory bodies.
Of all the solutions to insolvency, a Pre-Pack Administration offers the greatest choice in that the directors can choose whether or not they wish to offer to purchase the assets of their old company. The Insolvency Practitioner and his advisors can handle the negotiations the sale. As a result, the IP’s and their agents can select who actually buys the company assets to add to an existing company or connected party who wishes to form a new company.
This leads to the second main advantage to a Pre-Pack Administration scheme. When a company’s assets are sold to someone who is familiar with the business, this allows for continuity not only of the company but of the staff as well. Workers get to keep their jobs and if it is a large corporate enterprise, the community will benefit here as well. With so many companies going under, it highly beneficial to have a business continue trading even if under new ownership. Suppliers also benefit from the continuity that Pre-Pack Administration offers because under the new company with better cashflow, bills should be paid timely manner.
To the outside world directors sometimes feel that putting a company into a pre pack administration process looks more favourable and generally more like restructuring a business.
Some of the contracts the old business had may well no longer be needed by the new company. Property leases and equipment hire may not be required by the purchasing company. The purchasing company may well have much better income and expenditure models, those contracts can legally be terminated.
It should be noted that personal guarantees or debentures are not written off during a Pre-Pack Administration. Creditors do not receive any returns whilst the company is in administration it is only when the administration ends via an exit into liquidation or CVA or any other dissolution that creditors will be repaid any available funds.
Pre-Pack Administration is the sale of the old company’s assets to different company so that liquidation can be avoided. To this end, assets need not be liquidated but can rather be sold if needed. The IP and his agent will handle the transactions so that reputation of the company can be safeguarded which also benefits the continuity. The IP will begin dealing with the old company affairs as soon as it is administration.
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 also a number of disadvantages which you should be aware of before making the decision to enter into Pre-Pack Administration. Here are potential pitfalls which you may encounter if you are considering purchasing the assets of a struggling business through a new company.
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 it may not be your intention to avoid paying creditors, it may be perceived as an easy way out. Despite this, pre-pack administration is a perfectly legal way of purchasing an existing business and its assets through a newco, and in many cases actually provides creditors with a higher level of returns in comparison to a shutdown liquidation procedure such as a CVL. Moreover a Pre-Pack Administration aims to protect jobs by transferring employees over to the newco using TUPE regulations.
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. While the majority of company’s which fail do so despite the good intentions of its directors, some unscrupulous directors may be judged to have committed acts which directly resulted in the company’s downfall.
HMRC is especially keen to view this report because they may not allow for a VAT registration, or impose certain conditions such as payment of a bond if the director-turned-new-owner had a history of non-payment of taxes. Wrongful trading penalties may also be assessed retrospectively and imposed on directors of the old company.
If you’re still feeling confused, feel free to drop us an email or give us a call.
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Claire Middlebrook, Scott Bastick and Katie McLachlan are authorised to act as insolvency practitioners in the UK by the Institute of Chartered Accountants of Scotland
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