Pre Pack Administration

Pre-packaged sales in administrations, to give pre-packs their full name, are relatively new. They are also becoming increasingly popular, because they permit a business to continue with minimal interruption, while at the same time allowing insolvency issues to be resolved.

A ‘pre pack administration‘ is the sale of an insolvent business as it enters administration. Often the buyers are the previous directors or the managers of the business, and the sale has been negotiated before an administrator is formally appointed.

A pre-pack permits an entire commercial enterprise, including assets and staff, to continue operating. The legal entity may be changed, but the transition will often go unnoticed to customers, particularly in a retail environment.

Independent research suggests a pre-pack solution is better for staff, as 90% of employees retain their jobs, as opposed to just 60% when other forms of insolvency sale are used.

A significant difference between pre-pack administration and other insolvency options is the lack of consultation with unsecured creditors. When a company enters administration, a voluntary arrangement or a liquidation process, all the creditors are informed and can influence the outcome. A pre-pack is different because the business is sold before the unsecured creditors are even aware of the situation.

How does a pre pack administration happen?

When a company is in financial difficulty it must seek the advice of professionals, and in particular insolvency practitioners. All the various insolvency options must be considered, and it’s possible that a pre-pack sale could be the recommended solution.

The negotiations between potential purchasers take place before the company formally enters administration. This means that unsecured creditors are unaware of what’s happening and have no opportunity to comment on it.

Insolvency practitioners involved in pre-pack administrations have a responsibility to all the creditors. They are required to keep detailed records of the proceedings and to give an explanation of why pre-pack was the right solution in each particular case. They also have to demonstrate that they have marketed the business and this process may mean they receive a better offer from another party.

Having negotiated the sale of the business, the company resolves to enter administration. The administrators are able to conduct the sale of the business almost immediately. They have to demonstrate that they have acted in the best interests of the creditors, supplying a detailed explanation of their actions.

The Problems with Pre-Pack

There is a perception that pre-pack is allowing directors to continue to run a business without being accountable for the company’s debts. It appears that they can simply close down the insolvent company and continue trading under as a new one, leaving the creditors with unpaid debts they will never be able to recover.

This view has been encouraged by media reports criticising the use of pre-pack. However, in January 2009 strict new guidelines were issued to insolvency practitioners, making it clear that the process had to be as transparent as possible. This is to ensure that it only happens when it really is in the best interest of the creditors and offers the best solution.

As with all insolvency solutions, it’s essential to seek the best advice as soon as possible. Where pre-pack is being considered, and the existing directors or managers are planning to purchase the business, they need to consider taking separate advice for both sides of the transaction. The new company needs to demonstrate that it offers a viable way to run the business, avoiding the cash flow problems of its predecessor.

Touch Financial has provided solutions to a wide range of organisations, helping thousands of business owners over the years. If you want to know more about pre-pack or other insolvency solutions, make contact with us and have a no-obligation consultation with one of our experts. Find out how Touch can help you.

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