What happens in a Pre Pack Administration?
A Pre Pack Administration (commonly known as a Pre-Pack) is a formal insolvency procedure.
It is used to protect the business and assets of an insolvent company. In general a sale of the business or certain of its assets is agreed either with the company director(s), a connected party or a third party before entering Administration.
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Pre Pack Administrations – what are the benefits?
The advantages and benefits of a “Pre-Pack” are that there is a seamless transaction which ensures little disruption to the day to day running of the business. This benefits work in progress, assets, staff and customers. A Pre Pack Administration can be considered where:
- A company is insolvent either: on a cash flow basis (it is unable to meet its debts as and when they fall due) or on a balance sheet basis (liabilities exceed assets). It is also insolvent if any legal action has been taken against it, such as a statutory demand for an unpaid amount outstanding in excess of £750.
- The outcome of a Pre-Pack Administration is often considered to be a better alternative to other insolvency processes, such as a Company Voluntary Agreement (CVA) or a Creditors Voluntary Liquidation (CVL). The choice is determined by which procedure suits the businesses purposes and generates the greatest return to creditors.
Pre Pack Administrations, when used as a business rescue or restructuring process, have been open to criticism in the past, because of perceived abuses. Research shows that Pre-packs are often better for employees than a business sale as they allow the business to continue trading (at least in a new form) and this buys the company time, which can lead to jobs being saved as well as businesses.
What are the cons of a Pre Pack Administration?
Since a sale is effectively entered into Pre-Administration, critics have asked how a Licensed Insolvency Practitioner knows that they are obtaining the best possible price for the business without having “tested the market” by putting the business up for sale on the open market.
Questions have also been raised regarding the transparency of the transaction. Secured creditors are notified of an impending sale prior to the sale being agreed whereas unsecured creditors generally are not. In addition, if a sale has been made to a connected party this may be seen by creditors as a means to not paying its debts.
As with all Insolvency Procedures, however, Licensed Insolvency Practitioners (IPs) must follow strict rules and procedures
To help eliminate these potential abuses of process, Insolvency Practitioners have strict codes of practice to adhere to. These include:
- Disclosure to creditors of any attempts to market the company, examining the value with external benchmarks and where appropriate liaising with major creditors
- Disclosure to creditors of why the decision to proceed with a Pre Pack Administration was undertaken together with disclosure on connected party information.
- A report is issued to creditors as soon as possible allowing them to vote to agree to the action taken.
Pre Pack Administrations and TUPE. What is TUPE?
One matter to consider when dealing with staff is the Transfer of Undertakings (Protection of Employment) Act or TUPE.
Staff are protected from losing jobs during insolvency procedures. TUPE regulates how staff are moved to a new employer while retaining their accrued contractual rights. In a Pre Pack Administration, employees’ contracts are usually transferred to the purchasing company (although some staff may face redundancy later of course) along with existing contractual rights being met.
Need Pre Pack Administration Advice?
If your company is facing collapse from debt, HMRC arrears, cashflow or other financial problems and you have exhausted all possible funding issues (perhaps because your key lenders are not willing to support you) then please do contact us for a fully confidential, and FREE, initial discussion.
At the meeting, our Licensed Insolvency Practitioners will provide you with independent, professional assistance / guidance and go through all the possible options, and will identify those that will fit in with your company’s own particular requirements.
