What is a Pre-Pack Administration?

Often a source of debate, pre-pack pdministrations have supporters and detractors, both of which are quite vocal in whether they are a good way to help a business recover and go on to trade or whether they are simply a way for dubious directors to offload bad debt.

Hopefully the following article will help you decide which side of the fence you fall on.

What is a pre-pack administration?

In brief, it is where the sale of a business (and its’ assets) are arranged before it is shut down so that the existing (or new) directors are able to carry on the company without the burden of existing debts.

In a pre-pack situation a buyer may already have been identified or professional agents can source a buyer before the planned administration takes place.

Once this has been done, contracts are drafted and agreed.  As soon as the proposed administrator is appointed the contracts are then completed, usually on day one of the administrators appointment.

This process has been widely used since the start of the financial crisis in 2008, and according to Insolvency Service figures cited in the TMA (Turnaround Management Association), one out of four business administrations were pre-packed in 2011, of which 85% had their assets bought by the existing directors of the company.

Some famous examples of pre-pack administrations are the bed retailer Dreams and JJB Sports.

What do critics of pre-pack administrations say?

The process often allows incompetent and greedy directors to revive their company, leaving unsecured creditors at a loss.

What do supporters say?

Pre-packs enable the quick turnaround of a business, which saves employees jobs and enables economic growth to continue.

Pre-pack pdministration pros and cons

• Suppliers could continue to do business with the new company
• Higher return for creditors can be achieved in comparison to other processes because assets must be sold at market value
• Usually preserves the jobs and livelihoods of your employees
• Minimises disruption and loss of a good business reputation
• Suppliers may be unwilling to continue doing business with the new company if the old debts were left largely unpaid
• Some directors may make the same mistakes again

Before you assume that a pre-pack is the only way to deal with bad debt and continue trading there are also debt management plans for companies which are called Company Voluntary Arrangements (CVA).

Company Voluntary Arrangement pros and cons

• Allow directors to remain in control of their company
• Creditors are usually paid in full, depending on individual circumstances
• Flexible: can contain anything agreed between directors and creditors
• Less visible than other insolvency processes (good news for the business in the long term)
• Terms are set and cannot be changed once the CVA has been agreed upon
• Property cannot be disclaimed without the landlord’s permission, which can be costly

You can read more about Company Voluntary Arrangements here.

From the pros and cons lists above it is clear that the use of a pre-packed (or ‘Phoenix’) route should be considered carefully. If you are thinking of using a pre-pack there are two primary things to consider:

Will the pre-pack benefit your creditors or hinder them?

If your company is insolvent, it is likely that the business will fail and creditors will not benefit from doing business with you as it stands – after all, a share of nothing is nothing. Using this process could be the only way to pay your creditors and still retain some value from the business you have worked hard on.

On the other hand, if your business is solvent and therefore able to pay any creditors that you owe money to, it would be completely irresponsible to write off these amounts and only pay your creditors a share of what your assets are worth.

Will you make the same mistakes again?

This is another example of your personal circumstances affecting how responsible using a pre-packaged process would be.

Before considering a pre-pack, detailed consideration should be given to why the company has been unable to pay its debts, and whether anything would be different next time.

If the answer is no, you should have sound reasoning to prove that the new company you have set up will not come across, and fall at, the same hurdles. If the business is still deemed to be viable, a pre-packaged route may well be the right route to recovery.

It should go without saying that neither Pre-Packs or CVAs will suit all businesses.

The ‘Phoenix’ route is only appropriate for insolvent businesses that are deemed to still be viable in the future if their existing debts were paid off.

Struggling business?

If your business is insolvent, or you think it may be heading that way, the most important thing to do is to act quickly. Call us now on 0800 975 0380 or email [email protected] to get some free, no-obligation advice on what your options are; burying your head in the sand is never going to help!