Prepack Administration is when an insolvent business is sold prior to going into administration or liquidation, in order that the business can keep trading. The insolvent business can be sold to a ‘phoenix’ company, that is a business that has been set up by the existing directors before going into administration, or a third party.
Prepack administration allows the business to continue to operate with minimum interruption despite being in debt and facing creditors threats.
Pre Pack Administration is a relatively new insolvency process; however it is gaining popularity as it allows a business to continue trading whilst allowing insolvency to be resolved, the process also has many attractive advantages.
As with many insolvency processes, businesses will often have tried other options before deciding on this method. Businesses often choose this method because they are carrying debt that they can no longer afford to carry and their options are to either enter administration or enter prepack.
If the business is still viable and many people are employed then prepack is a great option, because the process allows the existing business to form a new company or a third party to purchase the assets. Whilst some people feel that prepack simply allows the directors to negate their responsibilities and walk away from bad debt the process is actually governed by strict legal guidelines, meaning that the process is only to be entered into if it is in the best interests of the creditors.