Are Pre Pack Administrations Ethical Or Unethical?
Published On: October 21st, 2021
A ,pre pack administration is an arrangement in which the sale of a business and its assets is agreed before an administrator is appointed. This means that the business is effectively sold before the administration is announced. Shortly after the administrator has been appointed to facilitate the process, the pre-arranged sale is officially implemented. This is ,different to company administration, where the company is only marketed to potential buyers after an administrator has been appointed.
Prepack administrations are perfectly legal insolvency procedures that are highly successful at protecting, as far as possible, the business and employees of a company that is in severe financial difficulty. That’s why they’re recommended by insolvency professionals. However, in spite of pre pack administrations being completely ethical, there are often negative connotations associated with them. As a result, pre pack administrations are all too often written off as being unethical.
Why Are Pre Pack Administrations Sometimes Considered Unethical?
As the sale of the business is negotiated before the administration is officially announced, there is often concern that pre pack administrations lack transparency. In particular, creditors may object to the fact that the business was effectively sold before they were notified. They may have concerns that the speed of the transaction limited the marketing of the business, and may have a particular mistrust ,if the sale was made to a connected person.
Why Is This A Misconception?
In response to these concerns it’s essential to emphasise that pre pack administrations always work in the interests of creditors. That’s why they are considered a legal and ethical insolvency procedure. As the sale of the business will always be on a going concern basis, trading can continue uninterrupted, allowing for job preservation and reduced redundancies. A prepack sale also allows the business to be sold at the best possible value before news of the administration reaches the marketplace. Not to mention, as the business is immediately transferred to the purchaser, administrators can usually avoid incurring trading costs, resulting in a greater return to creditors. These are just a few of the pre pack administration advantages.
The process is only unethical if directors intentionally defraud or commit wrongful trading during the time that the company is insolvent and then execute a pre pack administration as a means of trying to escape their debt.
In order to prevent this kind of misuse of the process, there are strict regulations in place to monitor and assess the process of pre pack administrations, including restrictions on the sale of the business to connected persons.
Regulations For Pre Pack Administrations
In April 2021, new regulations were introduced that will help to ensure that pre pack administrations are fair to all parties and stakeholders involved. The ,Administration (Restriction on Disposal etc to Connected Persons) Regulations 2021 (ARR2021) do not mention pre-pack sales specifically, however include all substantial asset sales that are made to a connected party within eight weeks of the administration.This will include all pre-pack sales to connected persons, and is likely to include most going concern sales in administrations.
This means that pre-pack sales to connected persons may only take place within eight weeks of administration, so long as the sale has been approved by creditors, or has been reviewed by an evaluator. The evaluator is a new role that was introduced alongside the regulations to act as an independent individual, reporting on whether a proposed sale is reasonable and should be sanctioned. This measure helps to ensure that the sale of assets to connected persons in pre pack administrations is always ethical.
Conclusion: Ethical Or Unethical?
In spite of the negative misconceptions that sometimes surround pre pack administrations, it’s important to emphasise that they are completely ethical. In fact, they are beneficial to all parties involved in the company. As we’ve mentioned, there are also strict regulations in place to prevent any parties from acting unethically in regards to pre pack administrations. This ensures they are enacted as a beneficial insolvency procedure that works to protect the business and employees of companies that are struggling financially.
If you think a ,pre pack administration may be the best option for your business, and would like to learn more about the process, please don’t hesitate to ,get in touch with our experienced team of insolvency professionals.