If your company is facing financial difficulties, you’re likely to be weighing up the options that are available to you. One of the options that you may be considering is a ,pre pack administration. In order to help you decide whether or not this is the right course of action for your business, the following guide looks at the advantages and disadvantages of pre pack administration. However, before we look at the main advantages and disadvantages of pre pack administration, let’s take a moment to explain what the process entails.

How Does A Pre Pack Administration Work?

,In a pre-packaged administration, the sale of the business is agreed before an administrator is appointed. This means that the business is effectively sold before news of the administration is announced. Shortly after the administrator has been appointed, the pre-negotiated sale of the company will be officially implemented.

This type of company administration is best suited to businesses where there is a realistic chance of a buyer, and a realistic possibility of that buyer making the new company a success. In other words, a viable business must exist to create a reasonable prospect of the business being sold successfully.

Advantages Of Pre Pack Administration

Whilst there are some disadvantages of pre pack administration, the overall advantages of the process are very strong. These include:

Business continuity: The sale of the business will always be on a going concern basis, ensuring it is quick and smooth, allowing trading to continue uninterrupted.

Value protection: News of insolvency can reduce the value of business. A pre pack sale allows the business to be sold at the best possible value before news of the administration reaches the marketplace.

Higher return to creditors: If trading is not interrupted, the company assets can be sold at a higher price, resulting in a higher return to creditors.

Job preservation: Pre-pack administration can help to reduce redundancies and ensure continued employment due to the fact that trading is not ceased as part of the process.

Reduced costs: As the business is transferred to the purchaser, immediately after the administrator is appointed, it means administrators can usually avoid incurring trading costs, which will also result in a greater return to creditors.

Quick process: Another major benefit of the process is the speed at which it can be completed. As the sale is already agreed before an administrator is appointed, it can be quickly implemented once the administration is announced.

Disadvantages Of Pre Pack Administration

On the other hand, the disadvantages of pre pack administration can include:

Negative perception: Although the process actually works to benefit creditors, there can be a ,misconception that pre pack administration is unethical. Often creditors mistrust the sale being negotiated before the administration is announced, particularly ,if the sale is made to a connected person. It’s important to emphasise that in spite of these misconceptions, this type of administration follows a completely ethical and strictly monitored legal process, meaning this shouldn’t be considered a major disadvantage of pre pack administration.

TUPE rules apply: ,Employees and their contracts must be transferred to the new company under TUPE (“Transfer Of Undertakings” (Protection Of Employment)). This means that directors cannot reduce staff to save costs (although the new company can make staff redundant), however the benefit of this is that it enables job preservation for employees.

Funding required: Another disadvantage of pre pack administrations is that funding must be in place in order for the sale of assets to happen. If no other funding is available, directors may have to use their personal finances.

HMRC security bond: It is likely that HMRC will demand a ,VAT security bond, before the new company begins trading, in order to cover any unpaid tax liabilities that they might accrue. This would only usually happen if the new company is ran by the same parties as the old company.

Directors’ conduct investigated: After the sale is finalised, the administrator is required to submit a report on the conduct of the directors. HMRC may want to view this in order to decide if they should allow VAT registration or impose certain conditions on the new company, based on the actions of the previous directors. Any evidence of wrongful trading by the old directors will be assessed separately.

What’s The Right Course Of Action For My Business?

As you can see, there are both advantages and disadvantages of pre pack administrations. Whilst there are disadvantages, it should be emphasised that where the sale is handled correctly, with the guidance of a licensed insolvency practitioner, many of the disadvantages we have mentioned should not come to light. Not to mention, the advantages can have major benefits for business owners.

Ultimately, the best course of action for businesses that are facing financial difficulty, needs to be assessed on a case by case by basis. To discuss the options available to your business, please don’t hesitate to ,get in touch with our experienced team of insolvency professionals for confidential advice.