What is Pre-Pack Administration
When a company is failing, there are a number of options available should the business be deemed worth saving. One of these is a process is pre-packed administration, commonly known as pre-pack.
Pre-pack administration involves the sale of a struggling company’s assets to a separate limited company which in most cases, would have been set up specifically for this purpose. This new company, or ‘newco’ would purchase the assets which would include the transfer of all existing contracts and employees, and the old company would subsequently be liquidated.
Pre-pack administration helps preserve the value of a business, retain goodwill, and ultimately save jobs. There must be a viable business to save and the business must be sold at a fair market value. The aim is for the sale to be effected as quickly as possible, shortening the transition period between owners and therefore minimising disruption to ongoing trade and limiting uncertainty for creditor and employees.
There is a lot of controversy associated with pre-pack administration, mainly surrounding the fact that in the majority of cases, the new business is run by the same directors as the one which originally failed. Due to this there are extensive rules and regulations encompassing the implementation of pre-pack administration in order to protect creditors, employees, and other stakeholders.
Who can apply for an Pre-Pack
A pre pack administration is most appropriate for larger companies as it a complex and quite costly procedure. It is works best where there is a severe threat to the ability of the company to be able to continue to trade. A critical supplier may withdraw support or there is a threat of a winding up petition. That said, there has to be a good "business" there that someone is willing to fund, even if the company cannot continue in its present form.
How does Pre-Pack Administration work
Pre-pack administration often involves selling the business and assets of the old company to its current directors, who then form a new company, or ‘newco’, with which to trade from. The new company must therefore have a finance channel in place in order to fund such purchases. In some instances the assets, work in progress, and debtor book can all be paid for over a period of time, allowing the new company time to get on its feet and generate income although it is likely that at least some funding will have to be put down initially.
What should I be aware of
Before beginning a pre-pack process, it would be wise of you to consider how your current suppliers, customers, and creditors would feel about dealing with the newco. Bear in mind that some may suffer a financial loss following the completion of the sale of the business to the newco. If you are renting business premises you will have to have a discussion with your landlord about the possibility of allowing the newco to take over the lease, likewise you must be sure your suppliers will continue to support your business once it switches over to the newco. Without the support of your key stakeholders you may find the success of the newco is impacted.
By law the administrator must be a licensed insolvency practitioner (IP). However, the company directors can participate in soliciting an asset purchaser to expedite or enhance the sales process, or as mentioned, they can purchase the assets themselves through a new company. All assets must be purchased at a fair rate as determined by a qualified RICS surveyor.
While pre-pack administration can be a powerful solution for company’s facing mounting debts and increasingly hostile creditors, it no longer becomes an option once a Winding Up Petition (WUP) has been issued. Time is therefore of the essence when considering the potential viability of this type of administration.