What is a pre-pack administration and would it be appropriate for my company?

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The administration process is designed to protect a company from creditor pressure, in order for a licensed insolvency practitioner to consider whether it is possible to achieve a better return for creditors than would be likely if the company were to be wound up.

The primary goal is to rescue a viable business that is insolvent due to cash flow problems. This can often be a tricky assignment. Customer confidence can be lost if their supplier is known to be insolvent. The situation can quickly escalate with key employees and contracts being lost. The end result can be a significant reduction in the value of the business and a poorer return to creditors.

A possible way that the value in the business can be retained is via a pre-pack administration.  This is a process whereby the business is marketed widely for sale prior to entering a formal sale process.  The sale would be agreed and the sale complete immediately following the appointment of administrators or as close to the appointment as possible.

 

Pre-pack administration pros

The merits of the pre-pack administration process include:

• Continuity of trade - Because all the marketing and negotiations are carried out upfront, the business can continue to trade, as long as the directors have acted quickly once they are aware of the company’s financial difficulties.
• Reduced costs - Much of the work is done by the directors of the company, under the guidance of a licensed insolvency practitioner, before the commencement of the administration. This means that once the administrator is appointed they do not have to spend time and money trading the company prior to its sale.
• Better return to creditors - Most importantly, the retention of the business’s value and the containment of costs means that the return to creditors can be optimised.

 

Pre-pack administration cons

The downsides of pre-pack administration include:

• Bad reaction from creditors - The sale of the business may well be completed before creditors even know that there is a major problem. They may think that the business has been sold at an undervalue and have concerns that the process is not transparent.

This is especially true if the sale is to a phoenix company (a new company often operated by the same individuals, which continues the same or similar business activities as the original business). To address that problem, it became mandatory from 2021 that an independent evaluator be appointed on every pre-pack administration to review the sales transaction and to give an opinion as to whether it should be allowed to take place. To allow a quick sale, evaluators are chosen by the directors of a company from a pool of experts. They must complete their examination within 48 hours, for a fixed fee.

• Problems with funding - Many banks do not like to fund the purchase of the trade and assets in a pre-pack administration to a phoenix company as they perceive the loan as being too risky.

 

When would a pre-pack administration be appropriate?

A pre-pack administration should be considered where a company has:

• Experienced cash flow problems due to a non-recurring event

This may be a large bad debt for example. The result is that the business is insolvent. Also, there may be insufficient funding to allow trading during the time it would take for an insolvency practitioner to sell a business in a standard administration process.

• An underlying viable business that is capable of being sold as a going concern

As part of the administration process, there is a moratorium. This means that the company is protected from creditors taking legal action against it, which in turn allows a breathing space to attempt to resolve the company's financial difficulties. Due to the underlying strength of the business, there is a realistic chance that future trading will be successful.

• A potential buyer

There needs to be at least one potential buyer. The directors are likely to know who these parties may be so can act quickly. It may be that the potential buyers could be the directors or employees of the ailing company, as well as a third party.

 

Could this rescue your business?

A pre-pack administration can be a useful tool in effecting a timely sale of a fundamentally viable business. It is essential to initiate the process quickly. The necessity to keep the sales process transparent is vital. The use of experienced insolvency practitioners means that the marketing and valuation process conforms to all standards.