What Is Pre-Pack Administration?
Often companies are restarted following an insolvency through a process known as pre-pack administration. This is where the sale of a business is agreed upon before the administrator is formally appointed. Once the administrator is appointed, the sale takes place very quickly.
This is opposed to regular administration, wherein it may take a while to find a buyer, or the company may end up going into liquidation or a CVA.
There are other ways of phoenixing a company, however; directors may buy their business back from a standard administration or from a liquidation. Regardless of the route used, there are a variety of financial risks carried by the process.
In this guide, we’ll be looking at the process and advantages of pre-pack administrations, and when it is a suitable choice for a business.
Contents
What Is the Process of Pre-Pack Administration?
1. Consult with an Insolvency Practitioner
If you think your business is insolvent, you should book a free consultation with an insolvency practitioner as soon as possible.
Early action is always important in cases of insolvency, controlling debt before it spirals out of control.
2. Company Is Valuated
If it’s decided that pre-pack administration is the best choice for the business, the insolvency practitioner will seek a valuation of the company. This will be conducted by a qualified agent who often specialises in distressed business sales. This gives an accurate figure to be used for the sale.
3. A Sale Is Arranged
Once the valuation is complete, the agent will prepare marketing material and market the business for sale. The marketing period will depend on the financial circumstances of the company, i.e. how long it can afford to continue to trade for.
If the business is being sold to an already-existing company, the insolvency practitioner will ask to see the business’s management accounts. This is to ensure it actually has the working capital to make the sale.
When the business is being sold to a new company, however, different verification measures have to be taken. The insolvency practitioner may ask to see a forecasted balance sheet and some proof of good cash flow. This also helps to prove that the business will be viable in the future.
There are strict guidelines that an insolvency practitioner should follow when advising on a pre-pack administration process, to ensure fairness and transparency.
4. The Company Is Placed into Administration, Assets Are Sold
When a buyer has been decided, the administrator is formally appointed. This can be done without the need for court approval. The administrator must be a licenced insolvency practitioner.
Once the administrator has been appointed, the sale will take place either immediately or very shortly afterwards.
5. Administrator Informs Creditors
Once the sale has been completed, the administrator must inform the company’s creditors. This must be done within 7 days of the sale.
Creditors usually don’t know that a pre-pack administration is going to take place until after the fact, so the administrator will need to explain why the route was pursued and how it presents the best possible outcome for both creditors and the company.
6. Administrator Pays Creditors
Once the company’s assets have been sold, the proceeds from the liquidation will go to repaying the company’s creditors. Some of the money raised will be used to pay for the administration fees.
7. Sale Is Complete
The company’s assets – property, equipment, staff, etc. – will all be transferred to the new owner.
If the business is being sold to a third party and you wish to retain some assets, you should purchase them from the company before placing it into a pre-pack administration.
What Are the Advantages of Pre-Pack Administration?
Business Continuity
In regular administration, the business may be required to stop trading while cutbacks are made in order to round up the necessary funds.
Pre-pack administration, however, offers a quick route out of corporate insolvency, smoothly transferring operations to a new legal entity. This can allow the business to continue trading as normal, minimising potential losses.
Minimises Negative Publicity
Administration is a very public ordeal, where the administrator is required – by law – to advertise the current state of the business in The Gazette, Companies House, and on all company correspondence.
This makes it very easy for potential customers to hear of the company’s unfortunate position. This may impact sales, damage brand image, and cause customers to lose confidence.
Pre-pack administration is a much quicker process. It allows the sale to be completed before the situation becomes too public, protecting faith in the company. This is better for the new owner and for company creditors.
Note: If former company members purchase the company, the business will not be able to reuse the same name
Less Costly than Regular Administration
Regular administration is time-consuming and intensive for the administrator, so it can attract high fees. Some administrations can also be quite lengthy, resulting in costs quickly stacking up.
Pre-pack administrations are quick and comparatively straightforward processes, meaning they generally cost less. The risk and costs are mostly assumed by the new buyer.
However, if you’re using pre-pack administration as a means to revive your company, you’ll need to buy back all of your assets at full market value. This will not be cheap.
What Is a Phoenix Company?
Named after the mythical Greek bird – which rises from the ashes upon its death – phoenix companies are businesses which have reformed in the wake of closure. The business may have shut as a result of administration or liquidation. The former owner then buys the business’ assets to resume trading.
Pre-pack administration is one of the most common ways to “phoenix” a company. Prior to the appointment of the administrator, it will be decided that the former owner, director, or shareholder, will buy the business. It can then continue trading as normal, without worrying about debt.
This isn’t a get-out-jail-free card though. There are rules around phoenix companies to prevent the practice from being exploited as a way to ditch company debts:
- Company assets must be purchased at full market value
- You won’t be able to reuse the company name
- Employee contracts must be carried over and respected
While there are exceptions to these rules, they generally prevent directors from shedding the responsibilities of an insolvent business by simply transferring their assets to a new one. The solution is typically used by directors who have received new investment and wish to make a fresh start.
Can I Pursue Pre-Pack Administration?
Pre-pack administration is appealing for a number of reasons. But is it the right choice for everyone? In simple terms, no. Circumstances might make the process unsuitable for either financial or legal reasons.
Generally speaking, the process must prove that it offers the best possible outcome for creditors. This means that any sale of the company must be at or near full market value.
Underselling may raise questions as to why the business wasn’t put into regular administration and its sale subjected to more vigorous marketing.
Statement of Insolvency Practice 16
As creditors normally find out the business has been sold after the fact, pre-pack administrations are a controversial subject in the insolvency world. To help increase transparency and trust around the process, the Statement of Insolvency Practice 16 (SIP 16) was put into effect.
SIP 16 explanations should alleviate concerns of vested administrator interest, insufficient marketing of the company, or underselling and depriving creditors. The administrator must:
- Keep a record of the reasoning behind the decision taken and all other alternatives considered
- Act in the interest of the company and its creditors – not just the directors
- Identify the buyer to creditors and disclose any relation to the company
- Prove the company has been adequately marketed; it cannot be sold to directors for less than the administrator could get elsewhere
These stipulations have been put into place to prevent any collusion between directors and administrators that might result in creditors losing out. When pre-pack administration is implemented, it must be justifiable for the creditors.
Is Pre-Pack Administration Right for Me?
Pre-pack administration can be a brilliantly cost-effective way to sell a company to a third party and satisfy company debts.
It can also be a great way for directors to gain a fresh start with their business. However, for directors trying to save their company, it may not always be the best option. It may be wiser to pursue a CVA or administration instead.
Figuring out the best outcome for your business can be hard, especially when facing the ongoing pressures of insolvency. Book a free consultation today to find out the right choice for you.
