24 February 2021

What is a Pre-pack Administration?

Chris Grocock Senior Partner & Head of Recoveries

Pre-pack Administration is a formal insolvency procedure in which a company sells some or all its assets to a buyer, which may be the existing company’s management, immediately upon the appointment of an administrator to enable the sale to complete.

In a normal Administration the Administrator is appointed to manage the company with a view to establishing whether the company has a future and can be rescued as a going concern. A pre-pack administration is different as the sale of assets is pre-negotiated before an Administrator is appointed.

How does a Pre-pack Administration Work?

The process of a Pre-pack administration usually involves the sale of a business and assets of the company, in order to ensure the survival of the business. The sale may be to a third party, or to the current Directors or management team. A new company may be formed (“newco”) to carry on the business. The process is overseen by an Insolvency practitioner.

The pre-pack administration must be in the best interest of the creditors as well as the company, and there needs to be evidence produced to show that the Pre-pack offers the best outcome.

There is a high degree of scrutiny required by the Insolvency Practitioner to satisfy himself that there is a justifiable reason for the “Pre-pack” and there is a need for transparency with the Insolvency practitioner, existing directors and potential purchasers examine all alternatives to market the business to other potential buyers to see if there is interest in purchasing the business and assets. There are strict insolvency guidelines governing the process which the Insolvency Practitioner, directors and potential purchaser must follow to prevent the process being abused.

These can include using independent parties such as the “Pre-pack pool” to confirm that the sale is being considered and undertaken for the right reasons.

The Advantages of a Pre-pack Administration

The main advantage is the immediate sale of the business without impact on the on-going trading position. This may result in jobs being protected and avoids disruption to the business which could cause financial loss leading to a poorer outcome for creditors.

If a company enters Administration or liquidation then the assets may de-value and may be more difficult to sell to potential buyers. Debts may prove more difficult to collect and on-going contracts (“work in progress”) harder to realise and turn into income for the company.

A Summary of the Pre-pack Administration

  1. The director’s realise that the company is insolvent and are probably under pressure from suppliers or creditors such as HMRC.

  2. The Director’s consult an Insolvency Practitioner for advice regarding a company’s insolvent position and an assessment of the options. The insolvency Practitioner will advise the Company on all options available, and may advise that a Pre-pack administration is the best way forward for the company and its creditors.

  3. Once it has been decided that a Pre-pack administration presents the best outcome for the company’s stakeholders, the Insolvency Practitioner works with the directors, the potential purchaser and their respective solicitors to prepare the sale agreement and produce the necessary documentation to place the company into administration and provide those stakeholders are as necessary with the notice of the proposed administration.

  4. Detailed valuations must be undertaken of the assets to be sold, which will form part of the administration decision process and support the report which the appointed administrator will provide to creditors following their appointment.

  5. The company enters administration and the administrator is appointed. A moratorium is created preventing creditors from taking legal or enforcement actions. The Administrator in a Pre-pack administration will (on appointment, or shortly after) then complete the pre-negotiated sale. The administrator will issue proposals to the company’s creditors, and the creditors will vote on them. At the same time the administrator will disclose to creditors why the company chose a Pre-pack administration, factors taken into consideration, any relationship between the insolvent company and the purchaser, and why it is deemed appropriate and which purpose of administration will be achieved.

  6. In addition, this will include full disclosure of information in accordance with the Insolvency practitioner best practice guidelines.

Pre-pack administration is a complex insolvency process and you are strongly advised to contact a licensed insolvency practitioner as early as possible. This will ensure that you can explore all options and decide upon the most appropriate, before creditors take steps to petition the company to be wound up by the court.

Wilkin Chapman Business Solutions’ team of licensed Insolvency practitioners, can provide the advice and help you need on an array of formal insolvency processes. Allowing you to make the best decision for you, your company and its creditors.

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