A pre-packaged Administration is in essence usually the process whereby the existing management purchases the business from the Administrator, either on day one or very shortly after the commencement of the Administration process. The Administrator’s duty is to act in the best interests of the creditors of the company going into Administration.
What Is An Administration?
What Is Pre-Packaged Administration?
Conventional Administration and pre-pack Administration follow the same rules and procedures once the process has formally started as an Administration insolvency procedure. However, the pre-pack Administration has one primary difference: typically the Administrator proposed by the Directors of the Company will often seek to negotiate the sale of the business and the company’s assets before the Administrators’ appointment.
It means the sale of the business and company’s assets occurs immediately after the Administrators’ appointment. So, it is different from the original procedure that was introduced in the Insolvency Act 1986, where Administrators start the business marketing after their appointment.
Pre-pack Administration is an integral part of the insolvency process. A company facing debts or cannot pay its debts when they fall due may seek to hire an Insolvency Practitioner to help the company overcome the financially distressed situation. The Insolvency Practitioner makes efforts to prepare the business and the company’s assets for sale.
However, this occurs when the company enters a formal insolvency process. Therefore, the pre-pack Administration arises from a focus on agreeing in advance the position about the marketing and sale of a company’s assets before it enters formal insolvency to try to safeguard the business of the company and try to maximise recoveries for creditors.
The Enterprise Act 2002 enabled a company to appoint an Administrator without reference to the courts in what is known as an out of court appointment. A Licensed Insolvency Practitioner needs to comply with the Statements of Insolvency Practice (SIPs).
Many have questioned the basis of pre-pack Administration which usually involves selling the business back to the existing managed without the debts. That is perhaps why regulatory bodies introduced SIP 16 to address the company’s concerns and afford greater transparency. The SIP 16 covers the following issues:
- The insolvent company’s directors and insolvency practitioner must clarify that before the Administration that their efforts are for the company and not for the directors
- Keep a record of the decision-making process and reasons for choosing the pre-pack Administration over other methods
- The buyer’s identity disclosure and the relationships with the company’s shareholders/management
Reasons for a Pre-Pack Administration
There are numerous reasons to conduct a pre-pack sale of the business. It needs to be undertaken in the interest of the creditors involved in the insolvency process. Some of the reasons to consider pre-pack Administration are:
- A lack of funding that prevents the Administrator from meeting the costs of continued trading after his/her appointment
- Risks associated with continued trading and the value of the goodwill
- Preserve the value of book debts owed to the company that might otherwise risk going unpaid
- Dealing with problems like redundancy, arrears of wages, pay in lieu of notice, and holiday pay
- Job preservation and liabilities reduction requirements for the company
Advantages And Disadvantages of Pre-Pack Administration
A pre-pack Administration focuses on the streamlined sales of a company in insolvency. The sale negotiations of the company’s assets occur before the Administrator’s appointment, typically leading to a simplified and quick sale.
Although a trade buyer or third party purchases the assets, it typically occurs when the failed business’s directors buy the assets and trade the business operations under a new company name.
The pre-pack Administration’s primary requirement is that the Administrator will work in the best interest of creditors. The speed of sale is the main advantage of a pre-pack Administration, aiming to result in higher returns for creditors.
Thus, pre-pack Administration is an effective insolvency process and transparency plays a crucial role in a pre-pack Administration.
From the point of view of the Insolvency Practitioner, his or her duty is to creditors to maximise realisations not to the Directors and not therefore to the new trading company itself. As a result, the advantages and disadvantages can be different depending on which perspective the matter is being looked at from. Creditors may well have a very different agenda to the Directors for example only but nevertheless, the duty of the Directors is to assist the Administrator maximise realisations.
Let us now discuss the advantages of a pre-pack Administration before we talk about its potential downsides.
Business And Brand Image Maintenance
The insolvency process carried out through the pre-pack Administration aims to protect the value of work in progress while focusing on the customers’ demands, needs, or requirements. Not only may pre-pack Administration contribute to the new company’s success by saving or rescuing the trading business, but it may help in preventing losses that can otherwise impact creditor’s returns.
In addition, pre-pack Administration may help lessen adverse publicity that often can occur with other forms of insolvency procedures.
Reduces Administration Costs
A pre-pack Administration enables focus on the rescue of the trading business without much of the burden of the historical debt. That way, you may have valuable working capital for establishing a new business.
Because a pre-pack Administration offers speed and reliability, the costs associated with it can be less than other alternatives.
Maintain Some Control As A Director
Another advantage of a pre-pack Administration is that you may keep some control over your business as a director if you are the pre-package purchaser through a new company. However, this assumption can be overstated as the Administrator in reality has control and Directors should not envisage that they will be able to have control.
It is crucial to analyse the situation why your business failed. That way, you may learn some lessons and use the insights to benefit the new company if you succeed in buying the assets or trade back as a result of the pre-pack.
Although many business owners and people in the corporate world may consider pre-pack Administration slightly controversial, it is undertaken considerably in the UK due to its strict regulations. Here are a few potential downsides of the pre-pack Administration.
Investigation Of Directors’ Conduct
After selling the business assets, the possibility is that the old company is then subsequently liquidated by the Administrator. The Liquidator in a Creditors Voluntary Liquidation will compile a report and submit it to the Department of Business, Innovation, and Skills (BIS) as part of the insolvency process. In any event, even if the company is not liquidated, the Administrator likewise has to issue a similar report to BIS.
The purpose is to give details about your conduct as the company’s director. You may therefore undergo an investigation process and you could wind up being disqualified as a Director.
No Change In Employees’ Rights
According to the TUPE legislation, the protection of employees often will apply to the pre-pack Administration. It means your new company will often preserve the employees’ roles. In such a situation, the employment contracts are transferred to the new employer to safeguard jobs by protecting employee rights.
As a result, this can cause significant liabilities for a new company, leading to significant outlays, such as monthly wages and other employment costs. So, no change in employees’ rights can pose risks to the new company, deteriorating its business operations and increasing its costs.
Concerns On The Pre-Pack Practice
Some people in the corporate world may view pre-pack Administration with concern. The primary reason behind this is that debts are written off, but it is crucial to know that pre-pack Administration aims for higher returns for creditors than alternative methods.
On the other hand, pre-pack Administrations may have public perception problems, such as losing goodwill from customers, challenges in obtaining credit from suppliers, and bad publicity, leading to loss of trades.
As a director, you will have to find funds to buy assets for your company. The Administrator will make efforts to sell these assets at a fair market value to streamline the process and work in the best interest of creditors.
One of the Administrator’s duties is to protect assets from being sold at an undervalue. That is the reason directors may find it a significant financial undertaking to access the funds. Likewise, it can be a time-consuming process to gather the necessary funds.
How To Carry Out The Pre Pack Administration Process?
A pre-pack Administration is an effective procedure for larger companies and corporations because it can be complex and costly procedure. The process is effective when an insolvent company faces problems, such as the inability to continue its trading operations.
Step 1: The Insolvency Practitioner
Take advice from a Licensed Insolvency Practitioner to discuss the overall procedure. Discuss the SIP 16 rules and include all options, such as:
- Company voluntary arrangement (CVA)
- Trade sale and refinancing
- Creditors Voluntary Liquidation
- Administration and pre-pack Administration
If you wish to choose pre-pack Administration, make sure you pass a resolution in the board meeting. The purpose is to ensure all the directors consider the pre-pack Administration. The resolution may include the appointment of advisors, including turnaround practitioners, Insolvency Practitioners, and accountants.
Step2: Develop A Solid Business Plan
Once you have decided to follow the pre-pack Administration route and understood all the dimensions, it is time to develop a solid business plan. Remember, your business plan for your new company is an integral part of the pre-pack Administration.
For instance, if you plan to sell your business and not your company to a new startup or subsidiary company, you may wish to consider drawing up a plan. Your plan might include details on profit and loss forecasts, balance sheet forecasts, and cash flow forecasts.
Analysing and adding these elements to your business plan will give you an idea of working capital requirements.
On the other hand, if your plan is about selling to an existing trading company, it may help to provide copies of management information and accountants to the Insolvency Practitioner and may assist to evidence that the acquirer is viable.
Step 3: Focus On Pre-Pack Administration Regulations
Focusing and understanding pre-pack Administration regulations allow you to understand the compliance issues faced by the Administrator.
The Insolvency Practitioner will usually get formal valuations of the intellectual property, assets, and goodwill of the insolvent company.
Similarly, you have to act carefully and understand your own duties. As a director of the insolvent company, you have a duty of care to the company’s creditors.
Therefore, it is essential to understand the legal aspects and regulations of the insolvency process because starting a “NewCo” could conceivably put you in a position of a conflict of interest. You may wish to consult with lawyers and take legal advice on such matters.
You may want to consider:
- Do clearing banks support the pre-packing to the shareholders/management?
- Does the landlord approves your new company and allows for occupying their property going forwards?
- Will your suppliers supply to your new company?
- What do creditors think about your decision to carry out the insolvency process through the pre-pack Administration method?
Step 4: Fund The Acquisition Of Business and Assets
Funding the acquisition of business and assets require you to focus on finances. Remember, this can be a time-consuming process, especially when looking for lenders who can help finance and fund the acquisition of business and assets. Research and find some specialist lenders may be required.
Some specialist lenders provide factoring and asset-based lending, while others provide loans and bank facilities. You may also access venture capital organisations to fund your pre-pack. However, venture capitalists may require personal guarantees from the directors of “NewCo” or small-medium enterprises (SMEs).
Funding companies, lenders, and venture capitalists typically will require a comprehensive plan that includes information on forecasts, such as valuations, making and funding a loss, and security requirements.
Step 5: Start The Pre-Pack Sale
You will usually be in a position to enable the pre-pack sale after you have acquired funds, the Administrator has met their compliance standards, and the board of a new company can fund the acquisition.
The Administrator will often be required to start the process by contacting floating charge holders, including banks and lenders, with security. You often can proceed and start the pre-pack sale if the bank or the lender has no objections.
Once you have confirmed that everything is approved and streamlined, the Administrator can make state their proposals by filing documents at the court. That way, you can progress the process of selling your business to a “NewCo” or third party.
A pre-pack Administration plays a notable role in the insolvency process, allowing the Administrator to sell the business to third-party buyers within a short period after their appointment. The conventional Administration methods and pre-pack Administration shares a wide range of similarities and follow the same legislation.
However, the pre-pack Administration is typically different from conventional methods in terms of the timing of business and assets’ sales.
The agreement about the sale of the company’s asset or business occurs in effect usually before or immediately after the Administrator’s appointment.
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