Pre-Pack Administration is often viewed as a favourable recovery option for insolvent businesses wishing to avoid liquidation. However, the concept of the business being sold before affected parties are notified can draw greater scrutiny from external stakeholders. Creditors will have a particularly vested interest in the sale of the business, leading to a number of questions that can be encompassed by one big one: ‘what happens to creditors in Pre-Pack Administration?’.
What Is Pre-Pack Administration?
Before we dive into the impact of a pre-arranged sale on creditors, it is crucial to understand how Pre-Pack Administration works and why creditors may question this process.
Pre-Pack Administration is a formal insolvency process whereby the sale of a business is already agreed upon prior to the official announcement of the Administration. Before relevant documents are filed in court and an Administrator is appointed, an insolvency practitioner will have negotiated the sale of the business and drafted relevant agreements. The sale can then be completed quickly when the Administrator is appointed, providing it meets the relevant rules and regulations outlined in the Statement of Insolvency Practice (SIP) 16.
Impact On Creditors
A company will only ever enter into Administration if it is insolvent and unable to pay its debts. A Pre-Pack sale therefore offers creditors a crucial opportunity to recover the money they are owed and achieve better returns than they would get if the company were to enter into liquidation.
Critically, the Pre-Pack Administration process can stand out as the most favourable option for creditors due to its speed and efficiency. If the company were to enter into Administration without a sale already agreed, creditors will have to wait for negotiations to take place and agreement to be reached before they can get any kind of return.
Furthermore, the public announcement of the Administration can harm the reputation of the business and reduce the likelihood of a sale that provides favourable outcomes for creditors. When the sale is agreed ahead of time, costs stay low and the reputation of the business can be better managed and preserved, increasing the chance that more money will return to creditors.
How Do Creditors Find Out About Pre-Pack Administration?
Clear communication is key to ensure that the Pre-Pack Adminstration process goes smoothly. At the very beginning of this process, the company in question must always consult and communicate with a licensed insolvency practitioner to determine that a Pre-Pack sale is the best option where creditor interests are concerned.
Creditors will then be informed of the Pre-Pack sale once it has been agreed. They will be provided with a detailed report that provides the reasoning and rationale behind choosing the sale, including why it took place and why it was the most suitable option.
Can Creditors Reject The Pre-Pack Sale?
A Pre-Pack Administration should only ever be chosen in circumstances where it offers the best outcome for creditors. However, there may be circumstances in which creditors wish to appeal the sale such as when they suspect directors of misconduct or believe that the insolvency practitioner has failed in their duty to provide the best outcome under SIP16.
If creditors wish to appeal the sale then they should first make sure that they have thoroughly read the report provided by the Administrator. Should they suspect wrongdoing, creditors are entitled to seek the replacement of the Administrator and can also contact the insolvency practitioner’s regulator to make a complaint. The regulator will then conduct a thorough investigation of what took place during the sale.
How Are Creditors Paid?
When a Pre-Pack Administration is completed, money made from the sale is used to first repay creditors. The government have outlined a strict hierarchy which determines the order of creditors payments and this must be followed in all cases. Creditors with fixed charges will always come first, followed by preferential creditors. The full hierarchy is as follows:
- Secured creditors with a fixed charge (such as banks and lenders)
- Preferential creditors
- Secondary preferential creditors
- Secured creditors with a floating charge
- Unsecured creditors
In cases where the sale results in the company being more successful than expected, the purchasing party may agree to pay a proportion of profits to creditors.
Given that creditors must be put first during Pre-Pack Administration, any business considering entering into this formal insolvency process should always consult an experienced and licensed insolvency practitioner. Receiving this input will ensure that you follow the appropriate steps and guarantee a favourable outcome for creditors. Creditors concerned about the prospect of a Pre-Pack sale can also speak to an insolvency practitioner to get advice about their rights and responsibilities in this type of Administration.
Whichever camp you fall into, the team here at Ballard Business Recovery can help. As experts in the whole range of business rescue options, we have provided trusted and transparent advice to a wide range of business stakeholders and can help you understand the best course of action for you and/or your business. Get in touch today.
