The content on this page has been written by Keith Steven and approved by Chris Ferguson, Licensed Insolvency Practitioner and Director of RMT Recovery and Insolvency
Pre-pack administration is an insolvency procedure that lets an insolvent company sell its assets immediately, or within a few days, after the administrator is appointed. This quick sale process stops clients, customers and employees leaving and can stop creditors from taking action. The sale is often to the current directors or shareholders, but it must be at a fair valuation.
The key difference from standard administration is the timing of the business and asset sale. The parties negotiate and agree to the transaction before the administrator is formally appointed. This constitutes a powerful, legal mechanism for selling the business to a trade buyer, a third party, or the existing directors operating under a new company (‘newco’).
The ‘newco’ must demonstrate viability and secure funding to acquire the assets of the old company (‘oldco’) at fair value. This procedure offers a swift solution to the threat of a winding up petition; however, it is not permitted after a petition has been issued.
Special rules apply when a pre-pack administration involves selling a business or its assets to a connected party, such as the existing directors or shareholders. These rules protect creditors and ensure the sale is fair and transparent.
Since April 2021, a purchaser buying a business or its assets from an administrator within the first eight weeks of administration must obtain an independent Qualifying Evaluator’s Report if they are connected to the original company. Alternatively, the administrator can obtain creditor approval for the sale.
The report provides an independent opinion on whether the proposed sale is reasonable. The purchaser must arrange the report, not the administrator.
Previously, connected-party sales could be referred voluntarily to the Pre-Pack Pool for independent scrutiny. However, take-up was low, prompting the 2021 regulations.
The following are key signs that your company may be insolvent:
Employee rights in a pre-pack are governed by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). As administration is legally viewed as a business rescue procedure, the following protections apply:
Automatic Transfer: All employees assigned to the business being sold transfer automatically to the purchaser. Their start dates, continuous service, and terms of employment are preserved.
Liability Transfer: The new company (Newco) inherits the liabilities of the old company (Oldco) regarding these employees, including outstanding wages and holiday pay.
Dismissal Protection: Any dismissals occurring solely because of the transfer are automatically unfair unless they are justified by an Economic, Technical, or Organizational (ETO) reason entailing changes in the workforce.
Consultation Duties: Directors have a legal duty to inform and consult with employee representatives. Failure to do so can lead to protective awards equivalent to up to 13 weeks’ pay per employee.
Pre-pack administration suits larger companies because of its complexity and associated costs. It is primarily applicable where there is a severe, immediate threat to the company’s ability to continue trading, such as a critical supplier withdrawing support or the threat of a winding-up petition. A viable underlying business capable of attracting necessary funding remains a prerequisite.
Consultation with licensed insolvency practitioners is the initial step. The resulting advice should be comprehensive and presented in writing for the board. SIP 16 rules mandate that all options—including CVA, trade sale, refinancing, administration, creditors voluntary liquidation, and pre-pack administration—must be thoroughly considered. If the board decides to proceed, a resolution must be passed formally instructing the directors to consider the option in greater detail and appoint necessary advisors.
Should the plan involve selling the business to a ‘newco’, a detailed business plan must be drafted. This document must include detailed profit and loss, cashflow, and balance sheet forecasts to indicate working capital requirements. The proposed administrator will require this evidence to confirm the new company’s viability.
Insolvency practitioner guidelines require the IP to market the business to fulfil their fiduciary duty to creditors. This essential step may expose the business to competitive bidding and the risk of sale to a competitor. Formal valuations of assets, intellectual property, and goodwill by RICS qualified surveyors are advised in order to reassure creditors.
Sales to Connected Parties
Under regulations introduced in April 2021, a substantial sale of a company’s business or assets to a connected party within the first eight weeks of administration requires either:
The independent evaluator considers whether the proposed sale is reasonable and provides a written report. The administrator must consider this report before completing the sale.
Financing must be secured to fund the acquisition of the assets and business. Specialist lenders can provide facilities such as factoring, asset-based lending, and loans. Detailed plans and forecasts are required by all funders to justify valuations and assess the possibility of loss, ensuring security needs are met.
Upon securing finance and satisfying compliance requirements, the proposed administrator is formally appointed. Following confirmation from floating charge holders, the administrator makes an application to Court. The business is sold to the ‘newco’ or third party almost immediately thereafter, ensuring the process is rapid and continuity is maintained.
Given the complexity and the need for legal input, allocate a budget of at least £25k for a pre-pack administration. If you require further advice on the suitability and process of a pre-pack administration for your business, you are encouraged to contact our experts for a detailed consultation.
Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT Accountants & Business Advisors. Prior to being acquired by RMT his company KSA Group has undertaken more than 300 CVA led rescues. Read our case studies to see how.
