Pre-Pack Administration
Pre-pack administration is a type of company administration where the sale of a business or its assets is agreed upon before the official appointment of an administrator, allowing for a swift sale and potentially preserving jobs and asset value.
What is Pre-Pack Administration?
Pre-pack administration is a formal insolvency process, through which a company’s business and/or its assets are sold to either a connected or an unconnected buyer immediately after administrators have been appointed. The sale to the purchaser is negotiated and agreed before the appointment of the administrators. The original company may then be dissolved or liquidation at a later stage.
How does the Pre-Pack process operate?
1. Initial consultations with an Insolvency Practitioner to examine options
A first meeting for the company’s directors to explain their problems and for the Insolvency Practitioner (IP) to set out the options for the company will normally be held on a pro-bono basis.
The IP will then request a range of financial and other information to be provided on a confidential basis, from which they will analyse the company’s operations, assets and outstanding debts, and assess whether pre-pack administration is the right way forward or make other recommendations. The IP must consider the position of outstanding creditors and be sure that the recommended process maximises their returns as far as is possible.
2. Asset valuations obtained
Before a pre-pack sale can be negotiated and completed, independent valuations and/or marketing of the company’s assets will be carried out.
It is usual that independent agents will be instructed who will work with both the company and proposed administrators to ensure that the advice provided in the initial meeting remains relevant. It is usual that the proposed administrators will us ethe valuation to prepare an estimated outcome statement to show the anticipated returns that each class of creditor may expect to achieve based on the information available at that time.
3. Marketing of the business and its assets
The company’s business and assets must be marketed for sale to as wide an audience of potential buyers as is possible in the time available without unnecessarily publicising its situation, nor damaging its value and its ability to continue trading until the completion of any sale. The prospective administrators are obliged to consider all genuine offers. They cannot ignore third party offers in order to favour any bid from the existing owners or management.
4. Appointment of administrators & completion of the pre-pack sale
Once the sale has been negotiated with the successful bidder and the sale and purchase agreement has been completed in draft form, the administrators are appointed and the sale is completed as quickly thereafter as possible.
5. Creditors’ meeting
After the sale of assets is complete the administrators provide a statement explaining to creditors the work undertaken and sale achieved. The content of this explanation and the information is stipulated under Statement of Insolvency Practice No 16 (SIP 16).
The SIP 16 disclosure and a Statement of Affairs prepared by the directors, if available, will form part of the administrators’ proposals, a document which sets out the expected outcome, along with projections of the administrators’ anticipated costs.
6. Eventual liquidation
An administration usually lasts for a maximum of 12 months unless extended. If there are no funds being distributed to the unsecured creditors other than from a prescribed pot, the company will be dissolved. If there are funds to distribute to the unsecured creditors outside of the prescribed part the company will usually enter liquidation, with the administrators becoming liquidators. The anticipated exit route will be set out in the administrator’s proposals.
What are the advantages of a Pre-Pack Administration?
Speedy asset
realisations
Pre-pack administration facilitates an efficient sale and a seamless transfer of the purchased assets, allowing the business to continue trading largely uninterrupted. This speed of sale has a number of benefits, most notably preserving asset values, saving jobs and maintaining commercial continuity with key suppliers and customer relationships.
Preserving
value
Once a company goes into a formal insolvency process such as administration or liquidation, the value of the business and its assets will fall, often dramatically. If a pre-pack sale can be negotiated and agreed before the company goes into administration, the damage to asset values can be substantially mitigated in most cases.
Saving
jobs
As a company approaches and then enters an insolvency process, there is a high risk of staff redundancies. A pre-pack allows for uninterrupted continuation of trade, this often means continued employment for all or most of its staff. Employee rights are protected by TUPE (The Transfer of Undertakings Redundancy (Protection of Employment)) regulations, which automatically transfers employee contracts over to the new owners.
Improving creditor
returns
Due to the speed of sale and the ability to continue to trade, the preservation of asset values can result in a better return to creditors than if the company went into liquidation and its assets were sold on a distressed basis. The reduction in job losses is also a benefit to the general body of creditors as the value of preferential claims are kept to a minimum.
"Whilst redundancy is unavoidable in some instances, a pre-pack administration often results in some or all employees keeping their jobs which is a far better outcome that with alternative insolvency solutions."
What are the downsides of Pre-Pack Administration?
Finance and
funding
The purchaser, whether they are connected or a third party, must have funding in place to complete the transaction and to finance ongoing trading.
Given the speed at which such transactions take place, the financial and trading difficulties which precipitated the problems, and often a lack of supporting financial and commercial data, arranging this can be a challenge.
The administrators may be willing to offer the purchaser some sort of stage or deferred payment arrangement.
Creditor
hostility
With some exceptions, suppliers and other creditors will typically be unaware that the company has been through a pre-pack process until after the sale has been completed. It is common for some to be suspicious or concerned that this route may not have been in their best interests. Some could refuse to trade with the new owners or will seek to tighten their terms of trade. The SIP 16 disclosure procedure may go some way towards alleviating these reactions by creditors.
It should be noted that if the sale is to a connected party, an independent
evaluators report must be obtained, and the purchaser may consider obtaining a
viability statement which again may assist with reducing the concern of
creditors when trading with a new company with parties connected with the failed company.
Potential reputational damage
Due to the seamless transition of the transfer of the business from the insolvent company to the new owners some directors may think that the change will go largely unnoticed, especially if the sale is to a connected party.
This is not the case and although pre-packs are often done with the best intentions of shareholders with employee and creditor interests in mind, there is always the possibility that a pre-pack administration will attract unfavourable publicity, particularly instigated by creditors who suffer losses.
Compliant with regulatory needs
As certain pre-pack sales are to the shareholders or management of the original company, the regulations surrounding disposals to connected parties will need to be followed.
A connected party is defined as “a person with any connection to the directors, shareholders or secured creditors of the company or their associates”.
Addressing business challenges
Schedule a consultation with our specialists
Regulation of Pre-Packs
To address widespread concerns, particularly among the creditor community, and generally to enhance the transparency of pre-pack administrations, two processes have been introduced to provide creditors with reassurance that the sales are being completed fairly.
The pre-pack pool
The pre-pack pool is an independent body comprised of experienced business people, whose role it is to scrutinise the circumstances of a connected party pre-pack sale and to provide an independent view of whether the proposed pre-pack represents a reasonable option under the particular circumstances of each case.
Although valuable as an independent viewpoint, the pool member does not have the power to affect or prevent a sale with which they are not satisfied.
Qualifying Evaluator’s Report
Obtaining a Qualifying Evaluator’s Report prior to the sale of a business or its assets to a connected person within eight weeks of the appointment of administrators has been mandatory since April 2021. The only exception to this is if the administrators have obtained creditor approval for the sale. It is the responsibility of the purchaser to obtain and pay for the qualifying report, not the job of the administrators who are not party to this process.
In addition, the proposed purchaser may consider obtaining a viability report but this is voluntary.
FAQs: Pre-Pack Administration
Additional information
This guide covers frequently asked questions by business owners and director’s considering a pre-pack administration as a route to addressing the challenges being faced.
This covers the decision-making process, what happens to the debt, how a pre-pack is different to other administrations, how long the process takes and why pre-pack administrations can cause controversy.
It’s important to fully understand the process before entering into it. If you have any further questions after reading this, contact us and we’d be happy to answer them.
Advice on the Pre-Pack Administration process
For more information on pre-pack administration, we offer an initial free consultation to review the situation and make recommendations on the best way forward. If we think that this is the best route forward, our specialists can support the business at every step of the way through the process.
Contact our Head Office on +44 (0) 20 3326 6454 to arrange a no obligation and confidential call with one of our Partners.
Latest Group Insights
We post regularly in our news and insight section discussing current industry topics.
Keeping informed
Sign up to our monthly newsletter sharing the latest insights and industry news