Pre Pack Administration Process and Procedures

Pre-Pack Administration is a specialised insolvency procedure that has gained significant attention in the business world.

Designed to provide a streamlined and efficient approach to rescuing financially troubled companies, it offers a lifeline to businesses on the brink of collapse.

This unique process allows a company’s assets and operations to be sold swiftly to a new entity, often controlled by the existing management or an external buyer, all while the old company enters administration.

By offering a fresh start, safeguarding jobs, and maximizing returns for creditors, Pre-Pack Administration has become a preferred option for companies seeking to navigate the complexities of insolvency while minimizing disruption and maximising value

What is a pre pack administration?

Pre-Pack Administration refers to a specific insolvency procedure employed to rescue a financially distressed company. In this process, the sale of a company’s assets and operations is pre-arranged before entering into formal administration. The arrangement is typically made with the involvement of insolvency professionals who act as administrators.

Once the administration process begins, the sale of the company’s assets takes place swiftly, often on the same day or shortly after. This allows for a seamless transition, ensuring business continuity and preserving value for stakeholders.

The primary objective of a prepack administration is to maximise the chances of a company’s survival by swiftly addressing its financial difficulties and facilitating its smooth transition to new ownership or management.

This procedure has gained popularity due to its ability to save viable businesses, preserve jobs, and maximize returns for creditors.

When would a pre pack administration be used?

A pre-pack administration is typically employed when a company is facing severe financial distress and is at risk of insolvency. It may be used as a strategic tool to save the business by quickly restructuring its operations and shedding unprofitable aspects.

This procedure is often utilised when traditional turnaround options, such as refinancing or negotiation with creditors, have proven unsuccessful or are not feasible within the available timeframe.

Companies facing urgent threats, such as loss of major contracts, mounting debts, or cash flow problems, may opt for a pre packaged administration to swiftly address their financial issues and secure a fresh start.

Additionally, it can be an effective solution in situations where preserving the business’s value, maintaining customer and supplier relationships, and minimising disruption to employees are crucial considerations

What’s the process?

It’s critical to take action right away if your business is under intense pressure from creditors, such as when liquidation or receivership are being threatened.

We strongly suggest speaking with a certified insolvency practitioner (IP) for guidance as soon as possible.

In order to determine the best line of action, the IP will evaluate your company. The IP must take into account all viable possibilities and guarantee that the chosen course of action maximises profits for creditors.

The following line of action is probably appropriate if a pre pack administration is chosen:

• The IP will coordinate an asset value for the business and create a statement of affairs.
• A thorough plan must be created to show the newco’s viability and capacity to purchase the firm if the company is to be sold to them.
• The IP will request copies of the buyer’s financial and management information if it is to be sold to an existing business to make sure it is viable and has the necessary resources.
• Additionally, the IP must promote the business for sale. They may sell to a new or existing company (not the one that will soon go into administration) if they receive no interest. However, if they get proposals, they are in a position to choose the most suitable buyer with the best offer, which raises the possibility that the business will be acquired by a rival.
• Shortly after the deal is in principle approved, the company is placed into administration, which means that any legal actions against it will be suspended (without the permission of the court or the administrator).
• The pre-pack administration will be started by the administrator, and the company will be sold.
• Following an explanation of the rationale behind selecting this bankruptcy procedure at a creditors’ meeting, the administrator will frequently suggest liquidation.
• Creditors frequently approve the recommendation, the company is liquidated, and the creditors are paid back proportionately with the profits from the liquidated assets.

Advantages of a pre pack administration?

A pre-pack administration offers several advantages for financially distressed companies:

• Speedy process: The quick turnaround time of a pre-pack administration allows for a seamless transition of the company’s assets and operations to a new entity, minimizing disruption and maximizing the chances of business continuity.
• Preservation of value: By swiftly addressing financial difficulties and restructuring the company, a pre-pack administration aims to preserve the maximum value for stakeholders, including creditors, shareholders, and employees.
• Job protection: The procedure prioritizes the preservation of jobs, as it enables the transfer of the business to a new entity, often under the existing management or an external buyer. This helps safeguard employment opportunities and minimizes the impact on the workforce.
• Enhanced stakeholder outcomes: A pre-pack administration provides a higher likelihood of achieving better outcomes for creditors compared to alternative insolvency procedures, as it aims to maximize returns through the sale of the company’s assets.
• Maintaining customer and supplier relationships: By swiftly transitioning the business to a new entity, a pre-pack administration helps maintain crucial relationships with customers and suppliers, reducing the risk of disruption and ensuring continued operations.
• Increased business viability: The restructuring and fresh start provided by a pre-pack administration can increase the viability of the company, making it more attractive to potential investors or buyers, and enhancing its prospects for long-term success.
• Reduction of negative publicity: The streamlined and efficient nature of the process often reduces negative publicity associated with a company’s insolvency, allowing for a more controlled and discreet resolution of financial difficulties.

Overall, a pre-pack administration offers a valuable tool for financially troubled companies to restructure, protect jobs, preserve value, and increase the likelihood of a successful turnaround.

Disadvantages of a pre pack administration?

While pre-pack administration provides several advantages, it is important to consider its potential disadvantages:

• Lack of transparency: The process of pre-pack administration can be perceived as lacking transparency, as the sale of assets and restructuring plans are often finalized before formal administration begins. This may lead to criticism from creditors, who may feel excluded from decision-making processes and question the fairness of the outcome.
• Creditor dissatisfaction: Some creditors may feel disadvantaged by a pre-pack administration, as they may receive lower returns compared to other insolvency procedures. This can result in discontent among creditors and potential legal challenges to the process.
• Employee uncertainty: While job protection is often highlighted as an advantage of pre-pack administration, there can be uncertainty for employees during the transition. Changes in management or restructuring may still result in job losses or changes in employment terms, causing anxiety and instability among the workforce.
• Limited market exposure: The rapid nature of a pre-pack administration may limit market exposure, as potential buyers or investors may not have sufficient time to thoroughly evaluate the business and its assets. This could potentially lead to lower sale prices or missed opportunities for maximizing value.
• Reputational impact: Despite efforts to minimize negative publicity, the use of pre-pack administration can still have a negative impact on a company’s reputation. It may raise concerns among customers, suppliers, and business partners, potentially affecting relationships and future business opportunities.
• Regulatory scrutiny: The pre-pack administration process has attracted regulatory scrutiny in some jurisdictions. Authorities may closely monitor the process to ensure compliance with legal and ethical standards, adding further complexity and potential challenges to the proceedings.

It is important to weigh these potential disadvantages against the specific circumstances and objectives of the company when considering a pre-pack administration as an insolvency solution.

The pre-appointment procedure

A business has a number of options for going into administration. In most cases, it would be by board resolution.

This would make it easier to file a notice of intention to appoint an administrator in accordance with Schedule B1 of the Insolvency Act 1986.

A copy of Statement of Insolvency Practise 16, more generally referred to as SIP 16, which governs prepack administration procedures, can be accessed here.

There are several ways for a business to enter administration. It would typically be decided by board resolution.

It would be simpler to do this if Schedule B1 of the Insolvency Act 1986 were to be followed when submitting a notice of intention to appoint an administrator.

You can acquire a copy of Statement of Insolvency Practise 16, also known as SIP 16, which regulates prepack administration operations, here.

• An agent appointed by the insolvency practitioner (IP) was given instructions to value and market the company (5–10 day procedure).
• The transaction is agreed upon, and the buyer and IP draught and agree upon a sale agreement. Terms may be for full payment at completion or may include a delayed payment component.
• In the event that there is a holder of a Qualifying Floating Charge (QFC), such person may nominate an administrator of their choice, but may also permit the directors to designate an administrator.
• To make sure the QFC holder is informed of the situation at all times, early participation is essential. Typically, the IP will get in touch with them to make sure they comprehend the plan.
• Usually between 10 and 15 days after the IP’s instruction, but it may be shorter or longer, administration begins and the sale is completed.
• At this time, ownership of the company and its assets passes to the buyer. The remaining assets of the company in administration are the sale proceeds and any other assets that need to be realised.
• After fees are deducted, the IP distributes the remaining assets to creditors, and the company is liquidated.

Pre-appointment fees may be paid in advance by the company or with money recovered during the administration, with the consent of the creditors via a “decision procedure.”

In essence, creditors vote on whether they think the fees are fair. Creditors also vote on the post-appointment fees.

Frequently asked questions

What happens in a pre pack administration?

In a pre pack administration it is an arrangement whereby the sale of all or part of a company's business and/or assets is negotiated and agreed, before an insolvency practitioner (IP) is appointed with the relevant documentation being signed and implemented, immediately or shortly after the appointment is made.

What is meant by the term pre pack administration?

The term pre pack administration, very simply is the quick sale of the assets of an insolvent business. The struggling business sells all or some of its assets to a new company.

Is pre pack administration legal?

Yes, a pre pack administration is legal. Although the insolvency process is a perfectly legal way for the owners and directors of a company to buy assets (i.e.- equipment, inventory, property, contracts, employees, etc.) of the old company for their new company.

Conclusion

In conclusion, pre-pack administration presents a valuable option for business owners whose companies are facing financial distress. Its advantages make it an appealing choice for those seeking to rescue their businesses and minimise the impact of insolvency. The streamlined process, preservation of value, job protection, and enhanced stakeholder outcomes are key benefits that can help struggling businesses navigate the complexities of insolvency while maximising their chances of survival.

Furthermore, the ability to maintain customer and supplier relationships, increase business viability, and reduce negative publicity can contribute to a smoother transition and long-term success.

While it is essential to consider the potential disadvantages and weigh them against individual circumstances, pre-pack administration offers an efficient and effective solution for business owners seeking to restructure, protect jobs, and preserve the value of their companies in times of distress.