What is it?
A “pre-pack” Administration is a widely used term in the insolvency profession that refers to a pre-packaged sale of the business and assets of the insolvency entity shortly following the Administrator’s appointment. This basically means that the business is already sold before the Administration is announced.
How does it work?
Typically the directors of the struggling business will approach an insolvency practitioner for impartial advice. On some occasions this process may identify that a viable business exists and there may be scope to generate interest to purchase the business and assets on a going concern basis.
The insolvency practitioner will be formally instructed to gather sufficient information regarding the business and assets to conduct a discrete advertising campaign to test the market. If there is interest, the insolvency practitioner liaises with the interested party(ies) to negotiate a sale of the business and assets. A qualified RICS accredited agent and a solicitor will be instructed as part of this process to ensure the best possible detail is being achieved.
The idea behind the process is that all negotiations are complete, and a sale agreement drafted before the relevant documents are file in Court to facilitate the appointment of the Administrator. The sale is then completed by the Administrator shortly following their appointment. This process typically achieves the second purpose of Administration set out within statute; i.e. to provide a better outcome to creditors than would have been the case if the company was placed into liquidation.
Is the purchaser pre-determined?
No. Whilst it is not uncommon for the incumbent directors or management to express an interest in purchasing the business and assets, this does not mean they are going to be the successful purchaser.
At all times the insolvency practitioner must be mindful of negotiating a deal that is in the best interests of creditors.
Advantages of a Pre-Pack Administration
The key advantages of a Pre-Pack Administration are as follows:
The sale will always be conducted on a going concern basis, ensuring a continuity of the business and maximising its potential value.
The alternative to a pre-pack administration is for the Administrator to trade the business for a short period as part of the Administration process to seek interested parties. In order to do this the Administrator will require funds, either by way of a banking facility and/or some assurance the revenue will not be severely affected by the company trading (In Administration). This is not always possible. The immediate sale of the business mitigates the effect on future revenue and there are no trading costs to account for.
In any insolvency process it is usual for the insolvency practitioner to experience some difficulty in realising the remaining debtor ledger, or perhaps complete any ongoing work in progress. A pre-pack administration provides a continuity of service to that customer, preserving the value of the assets available to facilitate a distribution to creditors
As any sale will almost always include the goodwill and intellectual property rights (including trading name, web domains etc) of the insolvency entity, the impact on the brand is mitigated. Not only does this increase the value of the business but can also save jobs.
The process is overseen and controlled by the insolvency practitioner (proposed Administrator) which reduces any personal exposure the directors may face for disposing of the business or assets themselves in the period leading up to an insolvency event.
Is the process ethical?
The nature of Pre-Pack Administrations are often called into question, typically by creditors who are not happy that the business has already been sold before they were event notified of the Administration. As demonstrated above, a Pre-Pack Administration does have major advantages that ultimately work to benefit the interests of creditors – which is why the process exists.
In order to ensure that the process has been administered correctly, the relevant Recognised Professional Bodies within insolvency have implemented Statement of Insolvency Practice 16 (SIP16), which specifically deals with the role of the insolvency practitioner within a pre-pack administration scenario and the disclosure that should be made to creditors following the sale. Such a disclosure will include:
A statement explaining why a Pre-Pack administration was considered to be the most appropriate process in the circumstances.
A full disclosure of the purchaser, and any connection they have with the insolvent company or its shareholders.
Details of the transactions that provides creditors with some comfort that the transaction was in the best interests of creditors.
A full disclosure of the insolvency practitioner’s involvement with the company prior to their appointment as Administrator. The insolvency practitioner may be instructed by the directors to act, but they should always act in the best interests of creditors.
Is a pre-pack administration right for me?
The correct insolvency process for your company will always be dictated on its individual circumstances. There is no ‘one process fits all’ conclusion that can be applied. If your business is in financial difficulty, please contact us at an early stage so that we can guide you through the available processes, ultimately with a view of rescuing the business.