What is a Pre Pack Administration?

Pre pack administration is an insolvency procedure which allows an insolvent company to sell its assets to a buyer before appointing administrators. It’s a powerful, legal way of selling the business on to a trade buyer or third party.

Alternatively, the business can be sold to the existing directors operating under a new company (‘newco’). This is usually done if the business is facing serious problems and creditor threats.

The ‘newco’ will need to be viable and have funding in place so it can buy the assets of the old company (‘oldco’) at fair value.

It can also be a solution to the threat of a winding up petition. However, pre pack administration is not permitted after a petition has been issued.

Here are the key signs you should speak to experts about your company’s financial position:

1. Threats from landlords.
2. HMRC demanding payment for PAYE and VAT.
3. The bank or trade creditors issuing warnings.
4. Directors are concerned about wrongful trading and personal risk.
5. Business has onerous contracts, too much property, too many employees or has lost market share/customers.

When Might A Pre Pack Administration Be Appropriate?

A pre pack administration is most appropriate for larger companies as it a complex and quite costly procedure.  It is works best where there is a severe threat to the ability of the company to be able to continue to trade.  A critical supplier may withdraw support or there is a threat of a winding up petition.  That said, there has to be a good “business” there that someone is willing to fund, even if the company cannot continue in its present form.

Process and Procedures of A Pre Pack Administration.

Step 1. Consult with insolvency or turnaround practitioners who are qualified to do a pre pack administration

The advice given should be thorough and presented in writing for the board, and possibly the bank.

At this point, the SIP 16 rules, insist all options including company voluntary arrangement (CVA), trade sale, refinancing, administration, creditors voluntary liquidation and pre pack administration must be considered. If the board of directors decide to pursue pre pack administration, a resolution must be passed within the board meeting stating that the directors will consider the option in greater detail.

It is likely that the resolution will include the appointment of advisors. These could be insolvency practitioners (IP), turnaround practitioners, or accountants.

Step 2. Draw up the business plan for the new company that will be created as part of the pre pack administration

If the plan is to sell the business (not the company) to a ‘newco’, then a plan must be drawn up.

This should include detailed profit and loss forecasts, cashflow forecasts, and balance sheet forecasts. This will give an indication of working capital requirements. The proposed administrator will require this as evidence that the new company can be viable.

If the plan is to sell to an existing trading company, the IP will require copies of management information and accounts from that buyer. Again this is to ensure that the acquirer is viable.

Step 3. Resolve any compliance issues – Pre pack administration regulations

Under insolvency practitioners guidelines, the IP must market the business. Often this requires sending sales memos to a database of potential buyers, placing an advert on their website and/or a local or national newspaper. It could also be listed on websites such as ip-bid.

If they get no indication of interest, they can then sell to the ‘newco’ or third party. However, if there is interest and several offers, your business could fall into the hands of a competitor. You may be able to buy the business back, but the outcome is not under your control.

At this stage, the IP will have to get formal valuations of the assets, intellectual property and/or goodwill of the insolvent company by RICS qualified surveyors. Generally, any offer needs to be commensurate with such valuations.

Likewise, if you/your colleagues are planning to buy the business, you must be careful with regards to your personal position. As directors of the dying company, you have a fiduciary duty of care to the company’s creditors. Starting a ‘newco’ can put you at risk of conflict of interest. It’s likely that you will need separate legal advice on both companies, so talk to lawyers with insolvency and pre pack experience.

The Regulation of Pre-Packs The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 became law from 30th April 2021.  This means that sales to connected parties will need to be “evaluated”.  The IP will also need to file a SIP13 report

The IP will take advice from their lawyers as to compliance and risk. This may be required to be paid alongside their disbursement. Strictly speaking, they cannot charge time costs in advance for the pre pack work, but can can charge for consultancy and fees.

Things to consider:

Ensure the pre pack process can be carried out under your current client contracts and connections to the bank. Think:

1. Several clearing banks say they won’t support pre packing to the incumbent directors/shareholders.
2. Will your landlord allow a new company to occupy their property?
3. Are your suppliers prepared to supply a ‘newco’?
4. How will your creditors feel about this approach?

Step 4 – Financing the acquisition

You will need finance to fund the acquisition of the assets and business.

There are many specialist lenders who can provide factoring, asset-based lending, loans, and bank facilities. Some venture capital companies may help fund the pre-pack as part of a ‘buy and build’ strategy.

Personal guarantees may be required from directors of SMEs. Larger companies may instead find that private equity and capital buyers remove directors as a part of the pre pack.

Any funders will require a detailed plan supported by forecasts to test the valuations, and assess the possibility of making and funding a loss, as well as how their security needs will be met.

Step 5 – Start the pre pack sale

Assuming you have raised the finance, the proposed administrator has satisfied their compliance and the board of the ‘newco’ can fund the acquisition, you can begin.

A contract is likely to be drawn up that appoints the proposed administrator formally. They will initiate the pre-pack administration by contacting any floating charge holders (banks or lenders with security). If they have no objections, you can proceed.

Assuming all is approved, the administrator can make an application to Court stating their proposals. Almost immediately after that, the business is sold to a ‘newco’ or third party – a quick and simple process.

Advantages and Disadvantages of Pre Pack Administration

Advantages

The main advantage is the ability of the company to continue to trade through the whole process.  This is important where any disruption could cause significant problems.  This also helps preserve the value of the brand.  Jobs are also preserved.

Disadvantages

Jobs have to be retained in the new company so the process is not useful if it needs to shed jobs to cut costs.

The new company needs to be funded by the new owners.  As the business needs to be marketed then the original owners may be outbid if they wish to buy the business back.

There can be some reputational damage with current customers and suppliers.

What are the costs?

A pre pack administration is a complex process and does need a fair amount of legal input so you would need to budget at least £20k.