5 Reasons Why Pre-Pack Administrations Work

There are mixed opinions about whether there is a place in the Insolvency Market for ‘Pre-pack Administrations’.  In this blog, I attempt to justify when they are appropriate and what they achieve.

So what is a pre-pack sale?

A ‘Pre-pack’ is where the assets of an insolvent company are packaged for sale, so that the sale can occur on the appointment date. 

It will already have been identified that the company is an insolvent ‘failing’ business that can no longer continue trading.  If the directors did continue trading, knowing that it is insolvent, they would run the risk that they may be liable for the company’s debts. 

Prior to a ‘pre-pack’, the options of the company will have been explored and considered.  This will include:

  • CVA – A Company Voluntary Arrangement, which is an agreement with the creditors to ‘ring-fence’ the debt.  The company will then usually make a contribution into the CVA from its future profits over a period of time (usually 3 – 5 years).  An Insolvency Practitioner will be appointed to monitor the arrangement.
  • Liquidation – formally winding the company up, this will involve a liquidator being appointed to realise the assets and use any funds to discharge their costs and any surplus monies would be available to creditors (in a certain order of priority).
  • Administration – an Insolvency Practitioner will be appointed as Administrator with three purposes, to rescue the company as a going concern, to achieve a better result for creditors than a liquidation or to realise property to enable a distribution to secured or preferential creditors.

Pre-pack Administrations can be used where a CVA is no longer working for the company and they are no longer in a position to continue paying the monthly contribution.  They are also used when a company has attempted to secure finance or a purchaser of the assets, but due to the level of debts it carries and falling profitability, it is not viable.

There is a myth that pre-pack administrations involve the sale of the business assets at a ‘knocked down’ price.  This is not the case.  An administrator (who agrees the sale) could be challenged if they took this action and if the challenge was successful, they would be personally liable.  Advice is always taken from reputable agents and valuers.  Pre-pack administrations may also be put before the pre-pack pool of professionals or an independent reviewer who will give their recommendations (or not) on whether this action is appropriate.

Prior to a sale, marketing activity is undertaken to determine whether any other parties are interested in the assets/business unless there is a very good reason not to do so.

So who benefits?

1. The Employees

With administrations, the employee’s contracts transfer over to the purchaser (TUPE).  This not only saves jobs, but also any claims that the employees have will be against the purchaser, not the company.

2. The Landlord

The landlord will normally benefit from the occupation of the leasehold premises by way of a license or the lease may be surrendered and a new one granted to the occupier.  Not only does this allow the landlord to benefit from future rental on the property, but it also mitigates the landlord’s claim, in most cases significantly reducing it. 

3. The Customers

The purchaser will normally purchase the order book and work in progress on any contracts, which not only gives the purchaser instant customers, but also minimises any disruptions to the customer as the customer will more than likely receive the product or service they signed up for.  The choice is theirs.

If the order book and work in progress was not purchased out of insolvency, it would possibly be abandoned and it would be usual for customers to claim for breach of contract.  The creditor’s claims in this case would increase significantly.

4. The Suppliers

Whilst many of the suppliers will have money due to them from the insolvent company (which they may or may not receive a dividend on), this is not their only loss.  They may also have lost one of their main customers and their revenues may fall as a result of this.  The purchaser of a pre-pack may wish to start a new account, with terms to suit the supplier.  Suppliers usually ask for payment up front until a relationship has been established.

5. The Creditors as a whole

In reality, the Administrator will achieve a better realisation as the assets will be sold in-situ, an amount for intellectual property may be gained and, generally, book debts are easier to collect if there is continued service/supply.  This equates to more money in the pot to share between the creditors.

Pre-pack administrations are like Marmite – people either love them or hate them, but in the right circumstances there is a place for them.  My article on who benefits is based on pre-packs being the right course of action for the company. 

If your company is struggling financially, we would be pleased to advise you on all of the options available.  Initial advice is free with no obligations.  Call Claire Foster on 01302 965485 or email claire@revivebusinessrecovery.co.uk.