What is a pre-pack administration?
Pre-pack administration is a type of insolvency process which aims to sell the business as a package rather than dissolve the business and dismantle its assets to sell them off. It can offer an attractive way of resolving an insolvency problem for some businesses as it allows the business to keep running without the debt it has accrued and the employees retain their jobs under new ownership.
In a pre-pack administration, the business can be sold to a trade buyer, third party or even an existing director or employee. A new company would have to be formed and it would have to have a new and unrelated name to the current business due to UK legislation. The company can, however, continue to sell products using brand names which means the brand equity is not lost.
Pre-pack administration is only an option when the business is in serious financial difficulty and may be facing legal action from their creditors. It is advised that you should seek professional help before taking steps to see whether it is the best option for your business by discussing your options with an insolvency practitioner. They may suggest other options which could save your company.
In a pre-pack administration, you can sell both tangible and intangible assets. The tangible assets can include property, equipment, inventory and vehicles. The intangible assets can include contracts with customers and suppliers, intellectual property, business processes and knowledge/experience held within the business by the employees. These assets can be preserved and packaged for the sale which can also include the employees.
Pre-pack administration is a costly and complex process, so it tends to be better suited to larger businesses that have the potential to thrive and become viable again once the debt has been cleared. Several requirements are placed on a company that must be met before they can go into a pre-pack administration. It also requires you to enlist the services of an insolvency practitioner to confirm you meet these requirements and ensure that the company is acting in the best interest of its creditors. This is why in some cases, a Company Voluntary Arrangement or Creditors’ Voluntary Liquidation might be a more appropriate option for the business as it can offer a better outcome for the creditors. Your insolvency practitioner will be able to advise you if this is the case.
What are the pre-pack administration rules?
Several requirements are placed on companies that want to do a pre-pack administration that are designed to prevent abuse of the process. An insolvency practitioner needs to be appointed to manage the pre-pack administration and to ensure that the company adheres to the legal requirements. These requirements include:
- The company has to be proven to be insolvent and not be viable at present.
- There must be no chance of the company recovering from their financial difficulties through other means.
- The business and the assets must be purchased at a fair market price which is considered reasonable for the creditors.
- The company and the insolvency practitioner must demonstrate that the pre-pack administration will be in the best interest of the creditors.
What are pre-pack administration employee rights?
Under a pre-pack administration, the employees will be TUPE across to the new company which will mean that they get to keep their accrued benefits and their length of service. However, given that the company has been going through a period of difficulty, it is likely that the new owners may want to restructure the company and make it more streamlined.
If the new owners want to change the employees’ roles or terms and conditions they will need to go through a consultation and negotiate a new contract with the employees before a new contract can be issued to the employees.
If the owners decide to make redundancies, they must honour the employees’ length of service with the business including that from the original business. Therefore, the employees will be entitled to redundancy pay that factors in the employees’ length of service and contracted notice period.
What is the pre-pack administration process?
If you think a pre-pack administration is right for your company, below is a simple guide to the process that is involved which an insolvency practitioner can guide you through.
- You need to consult a qualified practitioner who can advise you on pre-pack administration, like an insolvency practitioner. This advice should be detailed, and it should be presented to the board and resolution must be passed in a board meeting to pursue this option.
- You then need to draw up a business plan for the new company which should include information like a profit and loss, balance sheet forecast, and cash flow. This will be used by the insolvency practitioner to evidence the company’s eligibility for a pre-pack administration and in the sale of the business to demonstrate it is viable to potential buyers.
- The next step is to value the business and market it. This will include a formal valuation by an RICS qualified surveyor who will assess the business’ assets, the intellectual property and the goodwill. This valuation will then be used to promote the business to interested parties including trade buyers, third party or existing director/employee.
- The buyers will need to demonstrate how they will finance the acquisition whether that is through personal investment, bank loan, asset-based lending or factoring. The business plan developed in step two is important for the buyer to gain this finance.
- Once the buyer has the finance in place you can start the pre-pack sale if the insolvency practitioner is satisfied that all the compliance requirements have been met. An administrator will then be appointed, which can be the insolvency practitioner, who will then conduct the sale, draw up a contract and send the application to the court.
- The buyer can form the new company and take ownership of the assets.
- The company will then be formally closed by the administrator after the sale is complete and the creditors are paid.
What are the costs of pre-pack administration?
The cost of a pre-pack administration varies depending on your circumstances and the complexity of the business and its assets. Most insolvency practitioners agree to a price on a case-by-case basis which they will do before taking on the work.
However, one of the advantages of doing a pre-pack administration is that there are no upfront fees or court costs, so it won’t impact the company’s current cash flow issues and prevent the company from pursuing it. The agreed fees will be taken from the sale proceeds with the creditors’ approval, so it offers a good solution for the business and its directors.
What are the benefits of pre-pack administration?
There are several benefits to pre-pack administration which are:
- It can allow continuity of the business.
- It can offer a quick sale that can pay creditors.
- The employees can stay in their jobs under the new owners.
- It can help avoid any legal action from creditors.
- The directors maintain control of the business throughout the process which isn’t the case with all forms of administration or insolvency.
- It helps preserve the value of the assets.
- The new company can start with a clean slate as the debts will be written off.
- Products and brands can continue with little or no impact.
- If some of the existing managers or directors are the buyers it gives them a second chance to make a success of the business and learn from their mistakes.
- It allows the new owners to terminate problematic or unfavourable contracts that might be harming the business’ cash flow, such as property leases or equipment hire.
- There are no upfront costs to the business that can prohibit them from accessing it as the fees will be taken from the sale proceeds.
What are the disadvantages of pre-pack administration?
Some disadvantages that should be considered are:
- There could be a perception of secrecy around the arrangement that the staff or customers feel is being kept from them.
- It can attract unfavourable attention for the company and be unsettling for employees and affect the confidence that suppliers or customers have in the business.
- There might be a perception that the company was pre-packed to escape paying its debts as the debts from the old company will be written off in the process. This could result in clients not wanting to deal with the new company due to bad will and creditors might limit their risk exposure to the company or refuse credit.
- Employees will be TUPE to the new company which will include the new business adopting their current employee rights including accrued benefits and length of service.
- HMRC may require a security bond from the new company before allowing it to start trading and this will be used to cover future unpaid tax liabilities.
- The buyer needs to have the funding in place to enable them to purchase the business and its assets.
- The new company will need to have a new name that is different from the current name, so it is clear to customers and suppliers that the company is under new ownership. This will result in a loss of reputation although the company may be able to maintain product or brand names.
- The directors’ conduct will be investigated as part of the administration process to see if there were any wrongdoings by the directors that resulted in the company becoming insolvent.
What other options are available?
A pre-pack administration is not always a viable option or the right option for every business that is going through insolvency. This is why it is important to seek advice from an insolvency practitioner when the company first becomes insolvent as it stands a better chance of being able to turn things around.
There are many options available to insolvent businesses which an insolvency practitioner can guide you through and assess the best option for your business circumstances with you. Some of the other options available include administration, liquidation and financing.
Company administration can offer businesses an opportunity to seek professional support and breathing space from their creditors and potential legal action and allow time to assess their options. During administration, an insolvency practitioner will be appointed, and they will take control of the business from the directors. They will examine the viability of the business and try to rescue the business wherever possible. The insolvency practitioners will however work in the best interest of the creditors and the decisions they make will be to their benefit and ensure they get the most from the business. The outcome could be that the company is restructured, sold (which could be through a pre-pack administration) or liquidated.
Liquidation is a process that insolvent companies can use to dissolve their business if there is no way to rescue the business. An insolvency practitioner will need to be appointed and they will help you to assess whether liquidation is the right option for your business. There are a few types of liquidation which include Creditors’ Voluntary Liquidation and compulsory liquidation. Creditors’ Voluntary Liquidation is where a company voluntarily decided to go into liquidation through agreement by the directors or shareholders. Compulsory Liquidation is where a creditor files a winding up petition to the court who may grant a winding up order which will result in compulsory liquidation. The court will appoint an Official Receiver who will oversee the liquidation. It is advisable not to wait until this happens as it is not in the interest of the company or its creditors and it can adversely impact the directors during the investigation of their conduct. This could result in them being banned from being a director if wrongdoings are found. During any liquidation process, the insolvency practitioner will act in the best interest of the creditors and will ensure that they get the best outcome for them.