If your company is insolvent and cannot continue in its present form but there’s a viable business behind all the debt that’s worth saving, pre-pack administration could be an option for you.
In this guide, we’ll explain what pre-pack administration is, take a closer look at the process and understand whether it could be an appropriate insolvency procedure for your business.
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What is Pre-Pack Administration?
Pre-pack administration, short for pre-packaged administration, is a formal insolvency procedure that allows for the sale of a business as a going concern.
The assets of the business are sold to a buyer, which is commonly the existing directors operating under a new company, and administrators are appointed to facilitate the sale.
Once the assets are sold, the creditors of the old business are repaid using the proceeds of the sale and the business is closed down. The directors can then continue trading through the new business, often with the same suppliers and customers but without the serious debts and creditor threats that made running the old business impossible.
What is the Difference Between a Pre-Pack and a Standard Administration?
Administration and pre-pack administration are insolvency procedures that are governed by the same best practice requirements and are similar in what they try to achieve.
However, there is one key difference between the two. In a pre-pack, the sale of the business and any assets of the company has been negotiated before an administrator has been appointed.
The administrator is then appointed to immediately facilitate the sale. In the standard administration process, the administrator is appointed and then commences marketing the business and its assets with a view to a sale.
The advantage of the pre-pack administration process is that it allows the business to be sold as a going concern, without the appointment of the administrator impacting on the business’s operations.
It also helps to preserve the assets of the business, as debts can continue to be collected from debtors and work in progress can be continued, albeit under a new company name. A pre-pack can also be advantageous for the company’s creditors, as completing the sale immediately can prevent losses that would reduce their return.
Is Pre-Pack Administration Appropriate for Your Business?
A pre-pack administration is most commonly used by larger companies as the process can be relatively expensive (we’ll look at that in more detail later on).
However, for insolvent companies that are under pressure from their creditors and are receiving threats that could force the business into liquidation, this could be an effective route to take.
Importantly, behind all the creditor pressure and threats, there must be a viable company with a good business model that someone, whether that’s the existing directors or a third party, is willing to back.
As well as debts that it is unable to repay, the business may have too many employees, too much property or have entered into unprofitable contracts, which is why it’s struggling. The pre-pack will allow the directors to start again with a clean slate, cancel any unprofitable contracts and rid themselves of any assets they don’t need.
However, the appropriateness of a pre-pack administration for your business is not the only thing to consider. The insolvency practitioner who will act as the administrator is obliged to ensure that the pre-pack is in the best interests of the company’s creditors before it can go ahead.
They will consider other options such as refinancing, a company voluntary arrangement (CVA) and a creditors’ voluntary liquidation (CVL) before they go ahead with the sale. Only when all of these options have been ruled out will the pre-pack be allowed to go ahead.
How to Assess Your Business’s Suitability for Pre-Pack Administration
As well as the factors described above, there are also a few questions you can answer to help determine whether pre-pack administration is the right route for your business.
Could the new company be successful?
If the old company was initially successful before being overcome by debt or you have recently taken on a major new customer but are being blighted by creditor pressure, you may have reason to think the new company could be a success.
In that case, pre-pack administration may be a suitable option for you. It will allow you to continue operating while some or all of the assets are sold off to a new company and the proceeds are used to repay your creditors.
Is there sufficient value in the company’s assets?
To determine whether pre-pack administration could provide an acceptable outcome for your creditors, you need to calculate whether the value of the company’s assets is sufficient to repay the company’s secured debts.
If the secured debts of the company are not repaid in full, a secured creditor will still be able to take action against the company’s property or force you into receivership, in which case the control of your assets would pass to a receiver appointed by your creditors.
If an independent valuation shows that your assets are worth more than the secured debts of the company, pre-pack could be a viable option.
Can the directors afford to buy the company’s assets?
Pre-pack administration might sound like the answer to all of your problems, but only if the directors of the company have the funds to buy the assets at market value.
To buy the old company’s assets, the new company will usually need to have funding in place to provide the capital to complete the sale. In some cases, the appointed administrator may allow the assets to be paid for in instalments using the revenue generated by the new company.
Alternatively, if outside finance is difficult to obtain, company directors or shareholders may be willing to use their personal funds to purchase the assets.
Does the company have any other way to repay unsecured debts?
Unsecured debtors are sometimes considered to be the forgotten party in pre-pack sales, and it’s often the case that unsecured creditors do not receive all the money they are owed.
Once the sale of the assets has been completed, the old company will be liquidated and any unsecured debts that are remaining will be written off.
Therefore, to protect the position of the company’s creditors, a pre-pack administration is only lawful if you can show that you have no other way of repaying the company’s debts.
If it can be shown that the old company would have had no other option but to go out of business without repaying its debts, the pre-pack procedure will offer the most beneficial outcome for the creditors as a whole.
That’s because the secured creditors will be repaid in full and any remaining funds will be distributed among the unsecured creditors.
What Steps are Involved in the Pre-Pack Administration Process?
If you are considering a pre-pack for your business, it’s important that you know a little more about what the process involves.
- The company has creditors it cannot afford to repay, further financing is not available and the creditors are threatening to force the business into liquidation or receivership.
- The company directors contact a firm of licensed insolvency practitioners to discuss the viability of pre-pack administration. They assess the business and explore the options that are available to it.
- If a pre-pack is a suitable option, the insolvency practitioner will value the company’s assets and prepare a statement of affairs.
- If the assets of the business are being sold to an existing company, management accounts and other financial information must be provided to the insolvency practitioner to prove it has the necessary funds.
- If the assets are being transferred to a new company, financial statements including profit and loss accounts, cash flow forecasts and balance sheet forecasts must be provided to demonstrate the viability of the new business and its ability to purchase the assets.
- Once the sale of assets has been agreed, an administrator will be appointed, all legal action taken against the company will be suspended and the assets will be sold immediately.
- A virtual creditor’s meeting will be arranged by the administrator so that an explanation for the chosen insolvency route can be provided and a recommendation to liquidate the company will be given.
- The administrator will pay the creditors from the funds raised by the sale of the company’s assets and the business will be struck off the Companies House register.
How Much Does Pre-Pack Administration Cost?
If you’re considering the viability of pre-pack administration for your business, there are several costs to be aware of.
- Pre-pack set up costs - There is a pre-appointment fee that is agreed with the directors when the insolvency practitioners are instructed to proceed. It will depend on the level of work involved and will cost upwards of £1500 + VAT.
- Setting up the new company -- The cost to set up the new company is minimal. This is something the directors can do themselves or they can enlist the help of a third party.
- Valuation of the company’s assets - The old company’s assets must be valued by a reputable and independent expert and evidence may need to be shown to the creditors and the insolvency practitioner (IP) that a valuation has taken place. Once the assets have been valued, the IP or a solicitor must draw up a Sale and Purchase agreement. The cost of these activities will vary depending on the size and nature of the company. However, for a small company, it could be as little as £500 + VAT.
- Funding the purchase of the assets - This is the biggest cost you will have to consider. The amount that must be paid will be determined by the independent valuation and payment should be made from the new company’s bank account. If the amount cannot be paid upfront, it may be possible to reach an agreement to pay in instalments from the new company’s revenues.
- The liquidation costs - The final cost involved in a pre-pack is for the liquidation of the old company. The insolvency practitioner will prepare a statement of affairs and call a creditors’ meeting to appoint a liquidator. If the creditors do not object to the liquidation, the company will be struck off. The liquidator’s fee will typically start at around £2000 + VAT for a small company.
What are the Advantages and Disadvantages of Pre-Pack Administration?
If you’re considering pre-pack administration for your insolvent business, it’s important to consider the disadvantages of the process as well as the potential benefits it can bring. Here’s a quick summary of both:
- The pre-pack can be arranged and completed very quickly, which can lead to higher returns for creditors than alternative routes into insolvency.
- Trading can continue under the new company without any interruptions. That will protect the value of work in progress and customer goodwill and give the new company the best possible chance of success.
- There’s also continuity for the suppliers, who won’t have to worry about the loss of an important customer.
- The directors will maintain a degree of control over the business during the pre-pack procedure.
- The new company is free to trade and focus on the future without the burden of debts and the stress of creditor pressure.
- Old contracts associated with the rental of property or hire of equipment that were not working for the old company can be terminated to free up capital to build the new business.
- The process is typically a lot less expensive than the standard administration procedure.
- Pre-pack administration often avoids much of the adverse publicity associated with other insolvency procedures that could damage the brand and the prospects of the new business.
- The pre-pack may attract unfavourable attention from creditors.
- If the assets are sold to the directors of the existing company, there’s always the risk that they’ll make the same mistakes again.
- Existing clients and suppliers may not be willing to deal with the new company and creditors may limit their exposure or refuse to give the company credit altogether.
- If the old business was liquidated with tax liabilities that were written off, HMRC may request that a security bond is paid before the new company begins trading.
- Existing directors may have to use their personal funds to purchase the assets if they cannot obtain external funding.
- If the new company is going to be essentially the same as the old business but under new owners, Transfer of Undertakings (Protection of Employment) or TUPE will apply. That means existing employees will be transferred over to the new company and retain their existing employment contract and accrued benefits.
- The new company’s name cannot be the same or similar as the old company. That could lead to confusion among some suppliers and customers.
- The administrator will submit a report on the conduct of the directors of the old company after the sale has been finalised. If they are judged to have committed acts that directly led to the company’s downfall, penalties could be imposed.
What Happens to Employees in a Pre-Pack Administration?
One of the positive aspects of pre-pack administration in terms of the ethics and public perception of the process is the fact that the jobs of the employees of the old business can be saved.
However, this may pose a few problems for the directors of the new company when it comes to payroll costs that they may have been keen to reduce, in which case, redundancies will need to be made.
According to TUPE regulations, if the business is going to be essentially the same except under new owners, the existing employment contracts and accrued benefits of the employees must be transferred to the new business.
Although the employees of the old business do not have to transfer to the new company if they choose not to, they will be seen as voluntarily resigning from their position, and as such, they will not be entitled to redundancy pay.
In reality, a pre-pack administration is implemented because the old company is not trading profitably. To give the new company the best chance of success, it’s likely that the directors will need to change the structure of the company, which may involve certain departments being downsized or removed altogether.
That will inevitably lead to employee redundancies. Although the loss of jobs is not desirable, at least the redundancy process will take into account all of the rights the employees have accumulated with the old company, including their length of service and holiday entitlement.
Not Sure Whether a Pre-Pack Administration is Right for You?
If you’re considering a pre-pack administration for your business, one of our licensed insolvency practitioners will talk you through the process and discuss whether it could be a viable option for you. Just call 08000 24 24 51 or email email@example.com to arrange your free, no-obligation consultation.