Pre Pack Administration – a real way to rescue a core business

Pre Pack Administration

In the current economic climate, many companies in the UK have turned to the Pre-Pack Administration procedure to assist them with overwhelming financial issues, and the stresses that come with them.

What is Pre-Pack Administration?

Pre-Pack Administration is the process where the sale of some or all of the assets of a company is negotiated with a buyer before an insolvency practitioner is appointed as administrator.

The sale is then executed by the insolvency practitioner. The purchaser can be anyone including existing managers, competitors or industry newcomers.

Why use pre-pack?

When a business has the threat of insolvency hanging over them and they looking for ways to rescue the business whilst still retaining the businesses value for both creditors and any potential purchasers looking for rejuvenate the business, a Pre-Pack Administration is often the best choice.

In the pre-pack process, the company is put into administration and then sold shortly after an administrator has been appointed. It is usual that that the practitioner, the bank and the directors will have acquired valuations and agreed a sale price together with drafted contracts before the administration order is made. This enables a more streamlined and fast selling process of the business after the insolvency practitioner has been officially appointed as administrator.

On 1 January 2009, new rules in the ‘Statement of Insolvency Practice (SIP) number 16’ were introduced where the insolvency practitioner (referred to as the Administrator) is required to brief creditors in the full background of their appointment and justify the choice of a pre-pack process for said creditors.

The Administrator is also responsible to provide details such as business/assets, the price paid and any connections that the purchaser has with the company shareholders, owners and directors. The aim of these new rules is to encourage greater transparency in the process, giving creditors more access to information about the owners of a financially troubled business.

What are the advantages of Pre-Pack Administration?

• Returns to creditors can be improved.
• It is an effective way of extracting value from what could be a desperate situation.
• Businesses can be saved, protecting staff.
• Business debts can be written off.
• Supplier networks can be left intact.
• The business can apply to trade under a variation of its former name.

It is not uncommon for a Factoring Company to get involved prior to a Pre-Pack Administration. They would take over the company’s existing book debts and set up a similar facility to acquire the assets on behalf of the Purchasing Company.

Pre Packs – abuse of creditors or genuine business rescue?

When a company is facing financial collapse the decision to sell as a going concern should only be made with one purpose in mind – to maximise the realistic value of the assets.

The term ‘Pre-Pack’ Administration has become widely used and it is often wrongly assumed that, in a pre pack, the company’s assets or business are sold prior to a formal insolvency process. The term actually refers to an arrangement where the sale of all or part of a company’s assets is negotiated with a purchaser prior to the appointment of an Administrator.

Once appointed, the Administrator then implements the sale either immediately on or shortly after formal appointment. The sale is made to a third party or a connected party.

The main advantage of a sale via a pre-pack arrangement in Administration is that a business can be sold on before its own insolvency devalues and destroys the business and this advantage will be lost if the sale process is delayed leaving the closure of the business and liquidation as potentially the only option.

As far as the professional insolvency advice community is concerned, a Pre Pack is a legitimate form of business rescue.

Pre-Pack Finance

When directors are faced with insolvency, but still want to rescue the business, they may look to purchase all or part of the business.

This can be difficult, especially when the business has financial difficulties due to business debt. The options vary depending on the directors individual circumstances and type of business but it is possible to build up finance to purchase the business assets.

Financing of this type is usually used as a part of the pre-pack administration process. Funding is typically arranged in the form of asset finance on the physical assets of the company such as equipment and in some cases factoring to take over the company’s book debts.

In some Pre Pack Administrations the factoring company is engaged prior to the process. They take control of the book debts and set up arrangements for the purchasers of the business assets.

For more information regarding Pre-Pack Administration, Company Administration and Pre-Pack Finance and how we can help you, please call us or apply online