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Advantages and Disadvantages of Pre Pack Administration

23 October 2018

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Advantages and Disadvantages of Pre Pack Administration

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 has to be willing and capable of getting finance to buy the business, this can be a third party or a connected party such as the current directors.  This insolvency process is more common for larger businesses as it is quite expensive and involved.

Pre-pack administration is a viable business solution, but as with any venture it comes with its advantages and disadvantages...

Advantages of a Pre-Pack

Disadvantages of a Pre-Pack

The business continues to operate, with no interruptions or destroyed value

Negative publicity as directors can be seen to shed liabilities

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

Unsecured creditors think they have no say in the process and feel they’ve lost disproportionately

Quick and effective solution which can result in higher returns for creditors, when compared to other insolvency routes

Company may be sold to a competitor

Preserves company value

Loss or control by the directors as new funders/private equity may insist their removal

Cheaper than trading administration as administrators do not need to find funding to fund trade the business

Eventual sale price may seem too low to move things along quickly

Directors can keep some control over the business here. 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 failed

Job contracts have to be carried over into the 'newco' under TUPE rules

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 debt, remember that the business was already insolvent prior to any appointment/reaching an agreement

Categories: Pre Pack Administration Process and Procedures


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