Pre pack Administration – Rules and procedures
A pre pack administration is where the assets of the company are marketed for sale prior to the business being put into administration. Then the assets and business are transferred to a new company and the old company is put into administration all in one legal move.
Due to the controversial nature of this transaction, especially when the new company is run by many of the same directors, there are many rules and procedures that need to be followed as per the Insolvency Act 1986 and the Statements of Insolvency Practice ( SIP 16). This is to ensure that creditors are not left out of pocket.
KSA Group will only advise companies to use this powerful tool where all other rescue or turnaround options have been considered and discounted as there are lots of rules, regulations and costs that need to be considered. After meeting directors, free of charge, we will report that the other options are not suitable and then point out the benefits and downsides of administration as below.
Incidentally, please remember that KSA Group ALWAYS set out all options in writing, there is no charge for this professional report. If your clients are struggling and are facing aggressive legal action, such as a winding up petition, then administration could be an option to consider.
Rules and Procedures relating to Administration;
What would be the purpose of the administration?
There are three purposes:
- Company rescue (as a going concern) must be considered as the primary objective. This is normally a CVA.
- If that is not possible, then the administrator can achieve a better result for the creditors, both secured and unsecured, than would be obtained through an immediate winding-up of the company, possibly by trading on for a while and selling the business as a going concern.
- If neither of the first two objectives is possible, the administrator can realise any property to make a distribution to secured creditors.
The Administrator must state the purpose in his report to the court. We believe that administration is often chosen to “achieve a better result” when CVA could have been used!
Directors can be removed within a short period to mitigate overhead costs. Thus, the Administrator controls the business activity, not the directors.
The insolvency practitioner will require the directors (and officers of the company) to provide full disclosure as to their actions by completing a questionnaire. The administrator then uses this completed questionnaire when completing this “D” Form in respect of all directors and forwarding this to the DeBIS with his/her views as to whether the directors have acted correctly or otherwise.
What happens to the secure creditors?
- The bank is often the appointer of the administrator. The aim should, be to get a better result for the secured lender. Occasionally the secured debt is novated to the “newco”.
- Most bank’s have a panel of insolvency advisors from the large UK insolvency firms. If there is significant bank debt the bank will prefer to appoint one from this panel.
It is likely that preferential creditors, HMRC (from December 2020), employees for arrears of pay and holiday pay up to certain statutory limits, will receive a full dividend in most administrations. In the case of a pre-pack administration it is usual that any remaining employees are transferred to the acquirer, so there may well be few or no preferential claims.
Unsecured creditors may receive a very small dividend under the “prescribed part” or no dividend at all. This is often why the “noise” about administrations is led by disgruntled unsecured creditors.
Unfortunately the order of priority to repay creditors in insolvent administration is
- Bank fixed charge
- administrator’s fees
- preferential creditors
- secured creditors (floating charge)
- unsecured creditors.
Please see our page on creditors priority.
Thus unsecured debt legally ranks behind most other creditors except for the modest recovery under the “prescribed part”. There is usually little hope of any dividend for unsecured creditors.
So how does a Pre-Pack Administration differ?
New Company formed
Typically a “Newco” is formed to acquire the business from the proposed Administrator.
The business is valued and marketed for sale.
An independent insolvency practitioner (IP) is appointed to act as advisor prior to becoming the Administrator. He or she will ensure that a contract to sell the business is drawn up and valuations obtained of the business and its assets.
He or she will open discussions with an acquirer such as “Newco”. Typically this Newco can be formed by the directors, trade competitors or new investors.
This approach relies on the Newco/acquirer purchasing the assets of the business, to try and ensure continuity. The “company” is usually liquidated afterwards.
The value of the business should always be determined by an independent valuer such as a Chartered Surveyor. This is crucial as in most cases people argue that the business was sold off cheaply to the detriment of creditors.
The proposed administrator will market the business for sale. A third party may enter the bidding process. The administrator will expect the directors to inform him of any party they know of, or have had discussions with, who may be interested in buying the business. These parties will then be contacted by the administrator.
The process must obtain a BETTER RESULT than winding up for the creditors.
Contracts and employees transferred
If the company was to be pre-packed then the “Newco” would need to ensure that premises, contractual obligations, customer contracts and asset finance are transferable.
TUPE issues apply in Administration; under the Transfer of Undertakings (Protection of Employment) Regulations 2006 the new company has to adopt the employment rights of employees and may not remove employees. The National Insurance Fund will not meet the claims of redundant employees. New case law in 2011 allows employees made redundant by “oldco” before the Administration to bring unfair dismissal claims against “newco”
Under SIP 16 insolvency practitioners must observe strict rules to be open in the transaction process under pre-pack. KSA Group believes that we will see a decrease in the number of pre-pack and an increase in CVAs as a result of this tighter legal framework.
Worried about poor cashflow? How to win new work? How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was written pre Covid-19 and there are some likely changes to insolvency rules regarding wrongful trading. Please see this page here.