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.
Advantages of Prepack Administration
The biggest advantage of prepack administration is that the business can continue to operate. Once a company has decided to enter prepack and an administrator has been appointed the company is protected by the courts whilst the administrator sells the business and its assets to the new owners.
Prepack gets rid of debts, unwanted contracts and in some cases employees, although the process is often used to save jobs.
The process is so smooth and quick that many people will not realise that a prepack has taken place.
The cost of prepack is also lower than other liquidation or insolvency processes as the business is simply being purchased. Once the initial marketing, valuation and negotiations are over the process can usually be tied up within a few days if needed.
When the business is being purchased by a phoenix company, the assets must still be independently valued and an administrator used to ensure that a fair price is being paid for the business. The Phoenix company must have the funds to purchase the business and its assets.
Choosing Prepack Administration
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.