What is Pre Pack Administration?

A step by step guide to pre pack administration

In June 2014, the UK Government issued a report on the pre pack administration process. As a result, the pre-pack pool launched in 2015. However, it has became clear that only a few companies have consulted the pool.

In light of this, we'd suggest approaching independent insolvency practitioners to help with your pre pack administration. They are subject to strict codes of practice to avoid abuse (SIP 16), which also incorporates the use of the pre pack pool.

Here we have outlined the general process of pre pack administration, or you can check out our flow chart.

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

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

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

At this point, all options including company voluntary arrangement (CVA), trade sale, refinancing, administration, creditors voluntary liquidation and pre pack administration must be considered according to the new SIP 16 rules.

All of these should be carefully considered by the board of directors. If they 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.

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.

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.

At this stage, 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 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:

• Several clearing banks say they won't support pre packing to the incumbent directors/shareholders.
• Will your landlord allow a new company to occupy their property?
• Are your suppliers prepared to supply a 'newco'?
• 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.

Financing a pre pack in 2018 and beyond is likely to be very difficult. It will probably require personal guarantees from the directors for SMEs. Larger companies may find that private equity and capital buyer removes the directors as part of the pre pack.

The 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.

However, some banks will not allow a pre pack to a related party. RBS, HBOS and HSBC for example will not generally countenance pre packs with/to directors or members of the failed company. Therefore, it may be necessary to replace the bank debt first.

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.

This can be done on a Friday night, and by Monday the business is trading virtually interrupted.

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 though.  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.

Flow chart to help illustrate the process

The advantages and disadvantages of pre pack administration