Pre-Pack Administration: Is This the Right Option for My Company?

What is a pre-pack administration?

A pre-pack administration is an insolvency procedure in which a limited company arranges to sell some or all of its assets to a buyer before appointing an administrator (insolvency practitioner) to facilitate the sale.

The Insolvency Act of 1986 outlines that Insolvency Practitioners (IPs) instructed by companies are obligated to act in the interests of the company’s creditors – so a pre pack administration can only be feasible for your company if this is the case.

IPs are required to consider each option available to the company, including CVAs (Company Voluntary Arrangements), CVLs (Creditor’s Voluntary Liquidations) and refinancing.

If none of these are appropriate in your situation, a Pre Pack Administration is likely to be the best choice for you.

Below, we have outlined the criteria that should be considered when weighing up your company’s options.

1. Despite your current difficulties, is your business potentially successful?

Maybe your company has fallen at unforeseen hurdles, but there is a light at the end of the tunnel. You still don’t have the excess cash flow to repay creditors, though, and without funding it’ll be impossible to escape the vicious cycle of debt.

If you have spoken to your creditors and they have refused to accept repayment terms, then a CVA (Company Voluntary Arrangement) may be appropriate, but in some cases even these reduced repayment terms won’t allow for a full recovery.

If this sounds like your company, pre-pack administration may be the most suitable option for you.

The procedure would allow your business to continue operations as usual while its assets are sold to another company (which could be run by yourself – but bear in mind that the assets need to be sold at their market value).

These funds could be used to pay off creditors, thus avoiding the risk of legal action being taken due to non-payment.

2. Does your company have enough value in assets?

Once you have established that a pre-pack administration would be beneficial to your business and its creditors, you must learn whether your assets are valuable enough to repay all secured debts.

If not, the arrears will not disappear through this procedure, and the creditor could still exercise a legal charge against your company’s property – you can’t prioritise certain creditors (especially not Director’s loans!), so the assets must be valued at more than the total amount owed.

3. Does your company have any other ways of repaying its debts?

In order for a pre pack administration to be lawful, it must be possible to prove that you had no way of repaying unsecured creditors before initiating the procedure.

The main concern that many people have about the process is that it often results in unsecured creditors taking losses because the company is usually dissolved after the assets have been sold, allowing the directors to escape personal liability and leaving no one responsible for paying the debts.

In other words, pre-packs are only suitable for insolvent companies that were already going to go out of business without repaying their creditors.

If the only other option would have been to close down using another procedure, then the unsecured creditors would have taken a loss anyway – you would therefore be able to show in court that using this route was the most beneficial outcome for creditors overall; at least the secured creditors have been repaid in full.

4. Have your company’s directors got the funds to purchase the company’s assets?

Instead of selling your company to another party, a pre pack administration allows the directors the option of the company to buy the assets themselves under the name of a new company, which could then pick up where the insolvent company left off without the burden of debts.

This type of pre-pack procedure is often referred to as phoenixing, as the new company can arise from the ashes of the insolvent company, and becomes profitable in a much shorter time than it would have done otherwise.

If your company’s directors, by pooling their resources, are able to raise the capital needed to fund the asset acquisition, then a pre-pack route may be the best option.

5. How do you know if pre-pack administration is the best option for your company?

If you have gone through this list of criteria and you think that one of the insolvency procedures mentioned above would be suitable for your company, then now is the time to give us a call.

Next steps

If you’re unsure of what you need to do one of our experienced business advisers will be happy to have an informal chat with you to discuss your options, call us on 0800 975 0380 or email [email protected]