One of the questions that insolvency practitioners get asked a lot is, “what is a pre pack administration?”. Whilst people tend to be more familiar with general terms like ,‘company administration’ and ,‘business rescue’, when it comes to the question of what is a pre pack administration, there tends to be a little more confusion. That’s why we’ve put together the following, short and simple guide looking at what is a pre pack administration, it’s aims and who it’s appropriate for.
,Pre pack administration is an arrangement in which the sale of a business and its assets is agreed before an administrator is appointed to facilitate the administration of the company. Shortly after an administrator has been appointed, the agreed sale is officially implemented. This means that the business is effectively sold before the administration is announced.
When talking about what is a pre pack administration, it’s important to emphasise that the process aims to protect the business as far as possible, facilitating the sale
on a going concern basis that allows for business continuity and value protection.
That answers the question of what is a pre pack administration, however, what you may still be wondering is, how does it work?
The process of pre pack administration
Consultation from a licensed insolvency practitioner: If business directors are concerned about the finances of their company, generally they will seek the advice of an insolvency practitioner.
Assessment of business’ financial situation: The insolvency practitioner will assess the business’ finances and identify if a viable business exists i.e if there is a realistic prospect of the business being sold on a going concern basis.
Professional valuation and marketing: The business will be formally valued and marketed via a discrete advertising campaign to test the market.
Sale negotiation and agreement: If interest is shown then the insolvency practitioner will liaise with the interested party(ies) to negotiate a sale of the business and its assets. An agreement will be drawn up, overseen by a RICS accredited agent and solicitor to ensure the best deal possible is achieved. The proposed sale is then likely to be reviewed by an Evaluator – for more information on new legislation brought in during 2021, including the role of the Evaluator, please see our previous article here.
Appointment of the administrator: Once a sale agreement has been drafted, the relevant documents will be filed to court to facilitate the appointment of the administrator. The idea is that all negotiations are complete before the administrator is instructed, and this is again important to emphasise when discussing the question of what is a pre pack administration.
Finalising the sale: Once the administrator has been appointed, both parties will sign the sale agreement and finalise the transaction. This is usually completed within 24 hours of the administrator being appointed. From this point on, the purchaser will be able to continue trading the business as a new entity.
Completing the administration process: Following the sale, the administrator will carry out all necessary statutory demands, including notifying creditors of the administration and realising any assets not included within the sale. This should be concluded within 12 months.
Pre pack administration advantages:
We’ve looked at the question of what is a pre pack administration and how does it work, however it’s also important to emphasise the following advantages of the process:
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.
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.
The question of ethics
When talking about what is a pre pack administration, it’s not uncommon for the ethics of the process to be called into question. Namely, creditors may raise concern about the fact that the business was sold before they were notified of the administration.
In response to these concerns, it’s important to emphasise, as we’ve mentioned above, that this process has major advantages that ultimately work to benefit creditors. This is why the process exists. The ,Statement Of Insolvency Practice 16 (SIP 16) has also been implemented to ensure that the process is administered correctly, and to alleviate concerns.
Is pre pack administration right for me?
Determining whether or not a pre pack administration is right for your business, depends on the individual circumstances. If your business is struggling financially, you should always consult the advice of a licensed insolvency practitioner as soon as possible to determine the best course of action for your company.