Pre Pack Administration Process and Procedures

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.

When a business goes into administration one often hears about the administrators putting a business on the market as they try and sell the business. This is mainly because the administrators are charged with getting the maximum return for creditors as quickly as possible.

When is a Pre Pack Administration the best option? A pre pack is usually the best option if there is a good underlying business and there is an imminent threat of a creditor taking drastic action like a winding up petition or indeed a cut off of supplies/services which would damage the value and trust in the business.  The essential element is finance - someone, usually a third party or connected party such as the current directors, has to be willing and capable of getting finance to buy the business. This insolvency procedure is more common for larger businesses as it is quite expensive and complex.Pre pack administration is a viable business solution, but as with any venture it comes with its advantages and disadvantages... Advantages of pre pack administrationThe business continues to operate with no interruptions or destroyed value. Once the plan is ready and a contract of purchase is drawn up, the company is quickly protected by the court. This allows the administrator to sell the "business and assets". Debts can be written off. The process is quick.  If everything is in place then a company can be "pre packed" in a day. Higher returns for creditors. If the company's assets are sold with no interruption of business then a higher price is achieved.  This means there is more money for creditors than if the business went into liquidation.  The costs are lower. The process is cheaper than trading administration as administrators do not need to find funding to trade the business and there are less professional fees to pay. Directors can keep some control over the business. If the company is sold to people already familiar with how the business is to run, increases its chances of success. Lessons can be learnt to understand where the business failedDisadvantages of pre pack administrationThe process can generate negative publicity. The directors can be seen to shed liabilities and then carry on as if nothing has happened. Unsecured creditors think they have no say in the process and feel they’ve lost disproportionately Company may be sold to a competitor.  A competitor is often the most likely buyer as they know the business and will see it as an opportunity to expand. Loss or control by the directors as new funders/private equity may insist their removal Tupe rules apply. Job contracts have to be carried over into the 'newco' under TUPE rules so you cannot shed staff to reduce costs in the "newco" The "newco" will need to be funded. If the business is to be sold to a connected party (e.g. the former directors), they will need to fund the acquisition of the assets. These will need to be independently valued to avoid any issues. It is best to consult a specialist funder to help with this part of the process HMRC are likely to demand a VAT security deposit. If there is a substantial HMRC debt then HMRC may demand a deposit from the "newco" before they are allowed to register for VAT, as once bitten twice shy!  Remember that the business was already insolvent prior to any appointment/reaching an agreement. Any transaction to the existing directors or a connected third party need to be "evaluated" which adds time and cost.

TUPE stands for Transfer of Undertakings (Protection of Employment). Generally, this usually occurs when a business has been sold to another company and the employees jobs are transferred over to the new company. TUPE protects employees’ rights.

Pre-pack administration and liquidation restarts (phoenix companies) are both viable insolvency proceedings which have attracted controversy in the past. They have similar functions in that they allow a business to continue in a new guise. Here, we’ll explore both pre-pack administration and liquidation restarts and determine the key differences between the two. What is pre-pack administration? Pre-pack administration is when a company organises the sale of its assets before it appoints administrators.The company does this by using an Insolvency Practitioner (IP) to negotiate on its behalf. The IP will sell the business on to a trade buyer, a third party or ‘newco’ (a new company formed by the existing company’s directors).This quick and easy process stops all legal action and debt recovery and it allows the business to continue in a new company with the minimal of disruption.  Employees can continue to work with the new company.  The money paid by the new company for the old company is used to pay off the debts.  The process is all done in one move. What is a liquidation restart? A liquidation restart, sometimes known as a ‘phoenixing', is where the directors start a new company after the old company has gone into liquidation and then buys it assets such as stock, website etc.The business assets must be sold at a fair price. Otherwise, directors could face repercussions from the Insolvency Service, including director disqualification. What’s the difference between pre-pack administration and liquidation restarts? Firstly, let’s look at their similarities:The money from the sale repays creditors and the company can continue. The directors’ conduct will be investigated and liabilities, such as job contracts, will be carried over to the purchaser. Forming a 'newco' could incur significant expense for the directors.And what’s different:Pre-pack administration helps rescue the business and avoid insolvency, while a liquidation restart realises a company’s assets before it closes down. Pre-pack administration is one fluid motion: the sale of the company. A liquidation restart, by contrast, has two stages. The first stage is where the ‘newco’ sets up, begins trading and gathers enough working capital to buy the ‘oldco’ assets. The second stage liquidates the ‘oldco’, realises its assets (which the 'newco' buys) and winds it up. A pre-pack administration is governed by the rules of administration and the Statement of Insolvency Practice 16 (SIP 16), unlike a liquidation restart which has its own, less formal rules.