What is a Pre-Pack Administration?
Very simply, a pre-pack administration facilitates the quick sale of the assets of an insolvent business. The struggling business sells all or some of its assets to a new company. The new company can have the same directors as the original company or be a completely separate business that has an interest in purchasing the insolvent company’s assets.
The sale of the assets from the insolvent company is pre-arranged by an insolvency practitioner. Once the sale has been arranged, the company is placed into administration and the insolvency practitioner (now the administrator), will oversee the sale. Importantly, this allows the assets to be sold very quickly so the disruption to trade is minimal.
That makes pre-pack administration a very effective way to save the viable aspects of a business and many of the jobs of those working for the old firm. It can also offer a better return to the old company’s creditors than if the business was liquidated. The assets from the old company must be bought at market value as determined by an independent professional valuer to ensure the creditors receive the maximum possible return.
Any assets owned by the original company that are not sold as part of the pre-pack administration will be realised as part of the liquidation and the original company will be closed.
How does the pre-pack process work?
There are six key steps involved in the pre-pack administration process:
Step 1: Seek advice from insolvency practitioners
If you are concerned about the financial position of your business, you should contact the insolvency practitioners here at AABRS immediately. We will discuss your situation with you and provide confidential, no-obligation advice. At this point, we will explain every available option to you, including refinancing, a company voluntary arrangement (CVA), administration, creditors’ voluntary liquidation (CVL) and a pre-pack administration. If it’s decided that a pre-pack administration could be a potential solution for you, a resolution must be passed at a board meeting to consider it in more detail.
Step 2: Create a business plan for the new company
A business plan must be drawn up as part of the pre-pack administration if the business of the old company is to be sold to a new company. It should include cash-flow, profit and loss and balance sheet forecasts to give an indication of the viability of the new company. The insolvency practitioner (IP) will use this evidence to determine whether a pre-pack sale could go ahead.
If the business is to be sold to an existing third-party company, the IP will need to see management information and accounts from the buyer to assess whether that business is viable.
Step 3: Marketing the business
At this stage, the IP will obtain a formal valuation of the assets, the goodwill and any intellectual property of the company by a RICS qualified surveyor. The business can then be marketed to potential buyers through advertisements in local or national newspapers, website listings and sales letters to potential buyers. If there’s no interest, the business can be sold to the new company or a pre-arranged existing company. If there is interest from other parties than their offers will be considered by the IP.
Step 4: Financing the acquisition
You now need to think about how you’ll finance the acquisition of the business and its assets. There are specialist lenders who may be willing to provide finance through asset-based lending, factoring and bank facilities. Venture capital firms may also be a potential source of pre-pack funds as part of a ‘buy and build’ strategy. As a director of the new company, you may be asked to provide personal guarantees to access these funds.
Potential finance providers will want to see a business plan and financial forecasts. They will also want to know how their security needs will be met and test the independent valuations.
Step 5 – The pre-pack sale can take place
If the insolvency practitioner has met their compliance obligations and you can raise the finance to fund the acquisition of the assets, the pre-pack sale can begin. A contract will be drawn up to appoint the insolvency practitioner as the administrator and floating charge holders such as banks and other lenders will be contacted. If they have no objection and everything else is approved, the administrator will send their applications to the court. Soon after that, the business will be sold to the new company or a third-party.
Step 6 – The old company will be closed
The final step is close down the old company. The company’s books and records will be moved to the administrator’s office and any remaining assets will be realised. Once the administrator is happy there are no outstanding matters, the old company can be dissolved or liquidated to allow for distribution to the unsecured creditors.
What are the advantages of a pre-pack administration?
There are a number of compelling advantages associated with a pre-pack administration. That includes:
- The speed of the sale – The process allows you to free up cash quickly to pay your creditors and settle your debts. The sale of assets can take place as soon as the business enters administration, which helps to reduce the administrator’s fees.
- Business continuity – The fact that the old business is sold quickly and as a going concern allows operations to continue largely undisrupted under a new business name. This can contribute to the success of the new company and helps to protect relationships with existing suppliers.
- The directors maintain a degree of control – The directors maintain control of the business during the pre-pack process, which is not the case in other types of insolvency procedure.
- A second chance at success – If the existing directors or management team are the buyers, they will be able to learn from the mistakes they have made in the past and have a second chance to make a success of the business without being encumbered by historic debt.
- Brand image is maintained – A quick sale at a fair price ensures creditors are repaid more quickly and helps to preserve the reputation of the business and the goodwill it has built up. It can also help to save jobs, which further reduces the damage to public perception.
- You avoid compulsory liquidation – A pre-pack administration allows you to avoid the unpleasant compulsory liquidation process, which can cause serious damage to creditor-debtor relations.
- Old contracts can be terminated – Contracts associated with the hire of equipment and property that were causing problems for the old company can be terminated to free up cash-flow for the new business.
What are employee rights in a pre-pack administration?
The rights of employees during a pre-pack administration are governed by the Transfer of Undertakings – Protection of Employment (TUPE). It dictates that all employees of the old company must be transferred to the new company under the same employment conditions.
However, as the old company was not trading profitably, it’s likely that the structure of the new company will be changed, and that could lead to certain teams and departments being downsized or closed altogether. Inevitably, that will lead to employee redundancies.
Importantly, a pre-pack administration cannot be used to avoid the cost of redundancies. All the redundancy rights employees accumulated with the old company will be transferred to the new company. If their employee rights are not taken into account then they could make a claim for unfair dismissal against the new company.
How much does a pre-pack cost?
One of the biggest advantages of a pre-pack administration is its relatively low cost when compared with other insolvency procedures. As the due diligence is carried out before the administration and the sale of the old company is completed as soon as the administration begins, there is no requirement to pay the administrator’s fees for a prolonged period. That typically makes it cheaper than a standard administration procedure.
The costs of a pre-pack administration include:
- The pre-pack set-up costs
The first costs the directors or shareholders will incur is the time spent by the insolvency practitioner dealing with matters before the administration can take place. A lot of involvement is required before the appointment of the administrator to ensure a pre-pack is an appropriate insolvency solution. Although an initial meeting with the IP is usually free, the time spent dealing with pre-pack matters will incur a charge thereafter.
- Valuing the old company’s assets
The valuation of the old company’s assets must be carried out by a reputable independent valuer. If the old company cannot afford to pay this cost, it will have to be borne by the directors personally. Once the valuation has taken place, a sale and purchase agreement will also have to be drawn up.
- Funding the purchase of the old assets
The purchase of the old company’s assets should be made from the new company’s account. These funds will come from the directors of the new company or, if funds are limited, it might be possible for the new business to borrow the money it needs by securing the loan against the assets.
- Liquidation of the old company
The final cost of a pre-pack administration is the closure of the old company. The insolvency practitioner will prepare a Statement of Affairs and call a creditors’ meeting to appoint a liquidator. A liquidator will then be appointed to close the company down.
For a small or medium-sized business, a pre-pack administration will typically start from around £15,000+VAT.
Want pre-pack administration advice?
At AABRS, we will discuss the pre-pack administration process with you and help you understand whether it could be a viable option for your business. Get in touch with our team for a free, no-obligation initial consultation.