What Is a Pre-Pack Administration?

You own a business that’s been struggling for months. You’ve taken out loans, borrowed from friends and tried all legal options to keep the business afloat, but your debt continues to grow. With your business going into the red, stress levels are at an all-time high, and you aren’t sure what to do next.

If this sounds like your situation, you could be heading into insolvency and you might be wondering, ‘what is a pre-pack administration?’ Pre-pack administration is an insolvency option that has become more popular and commonplace over recent years. While insolvency may seem daunting, it can provide a much-needed lifeline for your business when you’re drowning in debt. Insolvency allows you to restructure, repay creditors, and save your business from bankruptcy.

If you’re curious about ‘what is a pre-pack administration in the UK’, this article aims to provide you with a comprehensive guide. We want to give readers a clear understanding into how does a pre-pack administration work, when it is appropriate to use, and what to expect during the process.

What Is a Pre-Pack Administration?

Pre-pack administration is a type of insolvency procedure that allows a company to sell its assets to a new owner before entering formal administration. While similar in purpose with other insolvency procedures, their intended outcomes are different. You can read more on the difference between administration and liquidation procedures here.

For pre-pack administration, the aim is to maximise the value of a company’s assets, preserve jobs, and minimise disruption to the business. The sale is negotiated and arranged before the administration process even begins. This allows the new owners to take over immediately after the appointment of an administrator.

Pre-Pack Administration Vs. Traditional Administration

Why should a business consider a pre-pack administration and not traditional administration?

The main difference between a pre-pack and traditional administration is the direction of the business after the sale. In a pre-pack administration, the sale of the company’s assets is agreed upon before an administrator takes control.

However in traditional administration, the sale of a business and its assets is arranged during or after the administration process. The administrator handles marketing the business to potential buyers. The sale process can take longer, and the outcome may be less certain.

Here’s a quick overview of the differences between pre-pack administration and traditional administration:

Pre-pack administration:

• The sale of a company’s assets and business are pre-arranged
• The sale was negotiated and arranged before the appointment of an administrator
• The sale was completed shortly after the appointment of an administrator
• A greater degree of control over the sale process
• May be controversial, with concerns over conflicts of interest and leaving creditors and employees out of pocket

Traditional administration:

• The administrator appointed to take control of the company’s affairs and assess whether the business is viable as a going concern
• Sale of the business and its assets may be arranged during the administration process or after liquidation
• The sale process can take longer
• Can be more transparent and less controversial
• This may result in the closure of the business and loss of jobs if the business is not viable as a going concern

In short, a pre-pack administration is quicker and gives the business greater control when selling their business compared to traditional administration.

How Does a Pre-Pack Administration Work?

So how does a pre-pack administration work? When a business enters a pre-pack administration, it’s sold to a pre-arranged buyer. Often, the sale is quick and efficient to allow the business to continue functioning and preserve its value.

The typical steps for a pre-pack administration are:

1. Preparation for sale:

The business makes the negotiations and arrangements ahead of time. A buyer is found and a deal is negotiated before an insolvency practitioner is engaged.

2. Appointment of an administrator:

The company appoints an insolvency practitioner (IP) to act as an administrator. The IP takes control of the company’s affairs and assesses the business to see if a pre-pack administration is a viable option to move forward.

3. Notification of creditors:

The IP will notify creditors of the proposed sale for approval. Creditors will have the opportunity to object to the sale within a strict timeframe.

4. Completion of sale:

Once the sale concludes, the pre-pack purchaser takes over the company’s assets and business.

A purchaser is chosen based on their ability to provide the best deal for the business and its creditors. The purchaser may be an external buyer, such as a competitor or investor, or even an existing stakeholder, such as a creditor or shareholder. They are identified and approached by the company or its advisors before the appointment of the IP.

Is Pre-Pack Administration the Same as a Company Voluntary Arrangement?

The short answer is no, they’re not the same. Both are insolvency processes but the difference between a pre-pack administration and a company voluntary agreement is the level of control the existing management team retains.

A company voluntary agreement is a legal agreement between a company and its creditors, allowing the company to restructure its debts and continue trading. This agreement does not necessarily involve a sale. Instead, it could be either a repayment plan with creditors, involving a debt reduction, extension of the repayment period, or a combination of both.

But, a pre-pack administration involves the sale of assets and the business to a pre-identified buyer. Leaving the discretion of management hires to the new owners.

You can read our detailed breakdown of a company voluntary agreement and its process here.

Is Company Voluntary Agreement (CVA) a Better Option?

It is not a matter of better options, because each process has its own advantages and disadvantages. For instance, a pre-pack administration allows for a quick sale of a company while a company voluntary agreement involves a lengthy negotiation process that can take years and may not always be successful.

Yet a company voluntary agreement allows a company to continue trading under the control of its directors. If the business is still viable but struggling, a company voluntary agreement provides more control to the existing management team, who can continue to run the business.

Ultimately, the best option for the business depends on the specific circumstances and the objectives of its stakeholders.

The Advantages and Disadvantages of Pre-Packing

There are some key advantages when choosing a pre-pack administration over other methods.

The first is business continuity. A pre-pack administration allows for a quick and smooth transfer of a business. It can help struggling businesses to transfer ownership and assets quickly and smoothly to a new buyer. This keeps the business running, preventing a break in trading and disruption to existing customers, suppliers, and employees.

The second is value protection. If news of insolvency or financial difficulty gets out, stakeholders can lose confidence and start to pull out from your business. A pre-pack administration can be completed before news of insolvency reaches the market, mitigating the risk of value diminution. Since the business is transferred with minimal disruption and negative publicity, any loss of business value is negligible.

So what happens to employees in a pre-pack administration? Job preservation is often one of the main reasons for using pre-pack administration. By transferring ownership and assets to a new buyer the business can continue uninterrupted.

Finally, pre-pack administrations have generally reduced costs compared to other methods. Since control, risks and costs associated with the business are transferred to the purchaser shortly after the appointment, the administrators avoid incurring more costs. This translates to greater returns for creditors.

But while there are plenty of benefits, there are also some potential drawbacks to pre-pack administration. The biggest is that the process can be controversial. It creates the perception of shedding debt and starting afresh, while leaving creditors and employees out of pocket.

A pre-pack administration can be opaque for unsecured creditors. Being informed only after the pre-pack is completed, they’re unable to object to the deal. This could damage the reputation of the business and lead to costly legal challenges or regulatory scrutiny.

There are also concerns that the greatest value of a business may not be achieved because opportunities for marketing and searching for a qualified buyer are limited. Leaving the business with a pre-pack purchaser may not be the best choice for the business.

Is a Pre-Pack Administration Legal?

Yes, pre-pack administration is a legal process in the UK. To prevent abuse and ensure transparency and fairness, the legal requirements for pre-pack administration are set out in the Insolvency Act 1986 and the Insolvency Rules 2016.

This includes appointing a licensed insolvency practitioner (IP) who must follow the Statements of Insolvency Practice (SIP) to act as an administrator and ensure that other alternatives are considered.

The appointed IP must act in the best interests of the creditors, not only the company’s directors or shareholders. The IP is also responsible for notifying creditors of the proposed sale, seeking their approval and providing a full history of the decision-making process. Creditors must have the opportunity to object to the sale within a certain timeframe.

All details including the identity of the buyers and connections with the insolvent company must be disclosed by the IP. They ensure that the sale price is reasonable and that the new owner is a suitable purchaser. These legal requirements aim to safeguard the interests of creditors and prevent abuse of the pre-pack administration process.

The many legal requirements aim to ensure transparency and fairness in the process, particularly to secure the interests of creditors.

Section 6: The Impact of Pre-Pack Administration on Employees and Shareholders

A business runs on the back of shareholders and employees providing resources and labour. But what happens to employees in a pre-pack administration? How will this deal impact them and what rights do they have?

One of the key benefits we addressed earlier considering pre-pack administration is job preservation. But in some cases when the new owner takes over, employees may still lose their jobs because they decide to downsize or make redundancies.

In such cases, employees have certain legal rights, including redundancy pay, notice pay, and outstanding wages. These rights may be limited, especially if the company is insolvent and already cannot afford to pay its creditors. Employees must understand their rights and seek legal counsel if necessary.

Investors or shareholders may see a significant drop in their investment value because the business is often sold at a discount. In the worst case, their investments could become completely worthless. Unfortunately, shareholders have limited rights to challenge the process, as the sale is conducted under the supervision of an insolvency practitioner and is subject to strict legal requirements.

Shareholders may challenge the process if they believe there are elements of misconduct or malpractice, whether by the insolvency practitioner or the company’s directors. But such challenges are rare and difficult to succeed in.

A pre-pack administration can have significant implications for both employees and shareholders. It’s essential for all parties to understand their rights and seek professional advice when in doubt, to ensure that they make informed decisions and avoid any legal complications or disputes that may arise.

It is important to note that a pre-pack administration should not be entered into lightly and should be considered in consultation with a licensed insolvency practitioner (IP) and legal advisors. It can have significant legal and financial implications, and it is crucial to understand the risks and benefits before proceeding with the process.

While it can seem complex with the rules and legal implications surrounding it, under the right circumstances a pre-pack administration provides a quick solution for businesses in severe financial difficulty.

Is Your Business Struggling with Financial Difficulties But You’re Uncertain What the Right Move Is?

Our experienced team is here to guide you through the process of dealing with company administrations. We offer clear and impartial advice designed to bring speedy solutions for complex problems, including what is a pre-pack administration in the UK. Let Irwin & Company be your partner in finding a path to financial recovery. Contact us now.