If your business is insolvent but certain parts of the business are still valuable, you may wish to enter the business into pre-pack administration.
Pre-pack administration is an insolvency procedure in which assets from an insolvent company are sold to a new company as the insolvent company enters into administration. This allows the company’s jobs, asset values and commercial relationships to be preserved.
By selling assets on to a new company quickly, business operations can continue with minimal disruption and the new company can operate without such significant debt.
The pre-pack administration process can be complicated, and pre-pack administration isn’t the best option for every business. However, if your business is insolvent and you want to continue with a new company, it may be a good solution for you.
As specialists in insolvency, we can assist with every aspect of pre-pack administration for your business. For more information, please continue reading below or contact us now to talk to our team.
Pre-Pack Administration: The Basics
Pre-pack administration is an insolvency procedure. Typically, an insolvent business enters into administration and its assets are marketed and sold by a licensed insolvency practitioner acting as the administrator.
In a pre-pack administration, a third party — typically a new company controlled by an existing director — will negotiate to purchase the insolvent business’s assets before the company starts the administration process.
Following the sale of the business’s assets, the funds generated are used to repay the insolvent business’s creditors.
Pre-pack administration has several advantages, both for creditors and for company directors that wish to continue operating the business. However, it also has several disadvantages that you should be aware of before considering this insolvency procedure.
Is Your Business Eligible?
Not all businesses can make use of the pre-pack administration process. In order to be eligible for a pre-pack administration, your business needs to be:
- Insolvent. Your business must be either cash flow or balance sheet insolvent, meaning it can’t afford to pay its bills as they fall due or has liabilities that exceed the value of its assets.
- Able to sell its asset as fair market value. Creditors need to be fairly compensated in a pre-pack administration. As company director, you’ll need to pay fair market value for the business’s assets if you wish to continue trading via a new company.
During any insolvency procedure, the aim is to provide the best financial result for the insolvent business’s creditors. Pre-pack administration is no different — during the sale of assets, it needs to be clear that a pre-pack administration is in the creditors’ best interests.
Advantages of Pre-Pack Administration
Pre-pack administration has a range of advantages over other insolvency procedures, both for company directors and creditors:
- Asset value is preserved. By selling business assets to a new company before the administration process, asset value is preserved. This can help to prevent job losses, maintain business relationships and allow the new company to continue operating.
- Creditors may receive more. Because asset value is preserved through the sale of business assets to the new company, creditors in the old, insolvent business may be paid more than they would receive from liquidation.
- Negative attention is minimised. Pre-pack administration allows a business to avoid much of the negative publicity that may occur if it were to enter into administration.
Disadvantages of Pre-Pack Administration
Pre-pack administration can also have certain disadvantages. Like the advantages of pre-pack administration, these can affect both company directors and creditors:
- Complex regulations. The pre-pack administration process is subject to complicated regulations and restrictions, including TUPE regulations that may affect your ability to make changes to employee contracts, compensation and employment.
- Effects on public, client and creditor relationships. Although not always the case, pre-pack administration may affect your business’s public perception, its relationships with clients and its credit terms with creditors.
- Director investigation. During the administration process, the conduct of company directors will be investigated. If any of the company’s directors acted inappropriately previously, this may affect the new company.
Is Pre-Pack Administration Right for Your Business?
Pre-pack administration has a range of unique advantages, but it’s not always the best option for every business. If your business has limited assets, for example, a pre-pack administration likely isn’t the best choice for ensuring creditors receive the best financial results.
If your business is insolvent but viable, pre-pack administration may be a needlessly costly and complex solution when an alternative like a company voluntary arrangement (CVA) is a suitable option for repaying its creditors. Other alternatives to pre-pack administration include:
- Company voluntary arrangement (CVA). A company voluntary arrangement allows your business to pay creditors via instalments, improving cash flow and allowing your business to continue to trade without legal pressure from its creditors.
- Administration. Entering into administration without a pre-pack asset sale may be a more viable option for certain businesses. In administration, an insolvency practitioner will be appointed to act as administrator and manage your business.
- Voluntary liquidation. Entering into liquidation voluntarily may be a good option if you believe your business is no longer viable.
- Turnaround financing. If your business is viable but burdened by debt that’s affecting its cash flow, turnaround financing procedures such as invoice discounting or factoring may help to improve cash flow and allow you to pay creditors.
Talk to Our Insolvency Experts
If your business is insolvent and under pressure from its creditors, it’s important that you cease trading and seek expert help as soon as possible.
Our licensed insolvency practitioners have helped hundreds of UK businesses in a wide range of industries successfully use insolvency procedures, including pre-pack administration. If your business is under pressure, we can provide personalised, expert advice and assistance.
If pre-pack administration is a suitable option for your business, our insolvency practitioners can complete the entire process to ensure the best outcome for company directors and creditors.
To discuss your business’s situation and learn more about what you can do, contact us now on 0800 9717185 or send us an email to schedule your free private consultation.