What Is a Pre-Pack Insolvency Process?
If your business is struggling financially, you may be considering the benefits of a pre-pack insolvency process.
A pre-pack insolvency process is an insolvency package or restructuring plan that’s agreed on by company directors before an insolvent business is forced into administration or liquidation.
The most common goal of a pre-pack insolvency process is to arrange the sale of an insolvent company and its assets to new buyers, allowing for a smooth transition and a continuation of business, even as the company enters into administration.
In this article, the expert team at Irwin Insolvency explains exactly what pre-pack insolvency is, what the benefits are, and when the process might be best for your company.
What Is Pre-Pack Insolvency?
Pre-pack insolvency is a process that allows a company to organise an insolvency procedure before appointing administrators to begin liquidating the company.
The aim of pre-pack insolvency is to save a company from being dissolved, but this is generally at the cost of the company being sold to new buyers, investors or even the existing shareholders or directors. In some circumstances, the aim of a pre-pack insolvency process may simply be to arrange the sale of a company’s assets to a buyer, thereby speeding up the sales procedure.
In this respect, the goal of a pre-pack insolvency is to prepare a company or part of a company for a smooth sale.
This means that pre-pack insolvency is commonly referred to as pre-pack administration, because the sale will be arranged before the company is taken over by administrators. Once administrators have taken over the business, they immediately sell the company or its assets to the pre-arranged buyers. This removes the need to enter into a formal administration agreement, and can save time and money during the handover to new owners.
Pre-pack insolvency has been legally permissible since the Enterprise Act 2002. This act allows for an administrator to be appointed to oversee an insolvent company without needing the permission of the court. This allows an administrator to be appointed in advance of the administration period. Legally, any administrator must be a licensed insolvency practitioner.
What Are the Advantages of Pre-Pack Insolvency?
The major advantage of the pre-pack insolvency process is that a restructuring plan can be organised and buyers arranged before administrators take over. When the administrators are appointed, everything is in place for them to immediately enact turnaround plans or complete the sale of all or part of the business to its new, pre-arranged buyers.
With standard administration procedures, an administrator is appointed and must then begin searching for buyers while attempting to turn the business around. This can lead to delays and missed opportunities, which can be avoided through a pre-package insolvency plan.
Other advantages include being able to appoint a preferred administrator in advance, while keeping the sale of the business private rather than public knowledge. This means the business can keep running, keep customers and keep its image and brand name in good standing with creditors, investors and the general public, even as it plans for a period of insolvency and administration.
Here are the most important advantages of a pre-pack insolvency process:
- The sale of the business, or parts of the business or assets is pre-arranged
- Directors have time to find the most suitable buyers to take over the business
- Directors can appoint an insolvency practitioner they trust to be the administrator
- Details of the pre-pack insolvency process can remain secret, thereby keeping the business name in good standing
- Customers will continue to buy or procure services from the business
- The business can be sold as a going concern, meaning it does not need to stop trading
- Assets won’t lose value when the company enters into administration
- Pre-pack insolvency procedures can result in smooth, quick turnarounds or sales
- Potentially saves jobs and ensures creditors can be paid
Is Pre-Pack Insolvency the Best Option for My Company?
Pre-pack insolvencies have major advantages over other forms of insolvency, particularly the standard administration procedure that the process effectively attempts to pre-empt.
Pre-pack insolvencies are best pursued by companies that have a large number of high value assets, or an important brand name and image they wish to preserve. It’s also an excellent option if the current shareholders or owners wish to rebuy the company or part of it, without the company being placed on the open market. If your company is facing financial difficulties and has recognised this, pre-pack insolvency is an excellent way to prepare the business in advance for a smooth sale transition.
However, pre-pack insolvencies by their very nature have to be arranged in advance. Leave it too late, and you will need to opt for other insolvency options in order to save or sell the business. Pre-pack administration also often receives criticism for the private nature of sales, and it may be the case that you undervalue your assets or sell too soon when a better price could possibly be found through an open sale.
There are several alternatives to pre-pack insolvency that can be attempted by a company that’s struggling financially. These include company voluntary arrangements and creditors’ voluntary liquidation. In all cases, you need to speak with an impartial insolvency practitioner for expert advice before committing to an insolvency process.
Contact Irwin Insolvency to Find Out More About the Pre-Pack Insolvency Process
If your business is facing financial difficulty, a pre-pack insolvency can be a smooth way to find new buyers while continuing to trade and maintain the company image.
To arrange a pre-pack insolvency, you will need the assistance of a licensed insolvency practitioner, as required by law. This is where the experienced team at Irwin Insolvency can help, and our consultants are on hand to provide you with the expertise you need.
Contact our team today to arrange your free consultation.