If your company has a strong business model but can’t continue trading due to debts and major financial issues, a pre-pack administration sale could be the best solution for paying your creditors while continuing the business.
A pre-pack administration sale is a process that involves selling company assets as the company enters into administration. Pre-pack administration lets an insolvent company’s directors resume the business while repaying the company’s creditors.
There are several advantages to pre-pack administration. Creditors benefit from the sale of company assets immediately upon entering administration, while directors benefit from the ability to create continuity for some aspects of the business.
Employees and suppliers of the business also benefit, as pre-pack administration is an effective way to preserve jobs and ensure that a viable business can continue in the form of a new company.
Is your company insolvent? If you’re interested in preserving your business while ensuring your creditors are at least partially repaid, read on to learn more about the pre-pack administration process.
Pre-pack administration quick facts
- Pre-pack administration involves the pre-packaged sale of your company’s assets, typically to the company directors, following the company entering into administration to protect itself from legal action by creditors.
- Although your company’s directors can buy its assets and continue running the business through a new company, you’ll need to pay a fair market price for the assets to ensure creditors are treated fairly.
- In a pre-pack administration sale, your business can preserve certain jobs and contracts, reducing the difficulties involved in restarting a business in the wake of liquidation.
- There are important regulations that need to be followed during a pre-pack administration sale, such as the TUPE regulations, which govern transferring employees from the company in administration to the new company.
- Pre-pack administration can benefit your company’s directors, its creditors and its employees by providing a streamlined legal process to keep trading and continue your business.
What is pre-pack administration?
Pre-pack administration is a process that allows your company to sell its assets to a third party in order to generate liquidity and pay its creditors. In a pre-pack sale, the company’s assets are typically sold to the directors using a new company.
In some cases, a pre-pack administration sale can involve the sale of company assets to an unrelated third party. Both solutions allows a business to continue, albeit as a different company, while providing a good outcome for the company’s creditors.
Entering into pre-pack administration allows a company to shed bad debts and low quality business contracts that are affecting its financial solvency. The new company can begin trading without significant debts affecting its ability to continue growing.
Pre-pack administration also allows employees to be retained. However, businesses may make some employees redundant during a pre-pack administration sale as part of an effort to make the company itself more financially viable.
There are several regulations that govern pre-pack administration. During the pre-pack administration sale process, your company’s assets will need to be valued by an unbiased third party in order to ensure that creditor interests are prioritised.
If your company is struggling due to significant debts but has a viable business that you would like to protect and continue, pre-pack administration could be the most effective solution available.
What are the advantages of pre-pack administration?
In certain situations, pre-pack administration offers significantly more advantages for both the company, its creditors and its employees than similar procedures, such as administration or a CVA. Some of the advantages of pre-pack administration are:
- Unlike administration, which can last several months and cost a significant amount of money, pre-pack administration is typically a cost-effective and convenient option for companies struggling with significant debts.
- Pre-pack administration allows a business to continue trading as a different company, creating a level of continuity that simply isn’t possible with other insolvency solutions.
- Pre-pack administration allows a company to quickly sell its assets on to a third party (or, alternatively, the company’s directors). This creates liquidity and makes paying the old company’s creditors a faster, easier process.
- A successful pre-pack administration preserves important contracts with suppliers and customers, as well as protecting jobs that would be lost if a company entered into liquidation.
- Using pre-pack administration, a company can get rid of troublesome debts, unprofitable or unexpectedly difficult contracts and other liabilities that are affecting its ability to trade successfully.
There are also several disadvantages to pre-pack administration. Entering into pre-pack administration can affect a company’s reputation by creating the appearance of its directors removing debts and contracts quickly while continuing to trade.
Your company will also face limitations on the steps it can take to remove debts and liabilities during pre-pack administration. For example, your company will need to comply with the TUPE regulations, which can affect its ability to end employment.
Finally, your company needs to enter into pre-pack administration relatively early in the insolvency process. Your company can’t use pre-pack administration to sell assets after one of its creditors has been issued a winding up petition.
Is your company eligible to use pre-pack administration?
Not all companies can use pre-pack administration. You will need to speak with an insolvency practitioner after realising your company is insolvent to learn whether pre-pack administration is a viable solution.
In general, companies that meet the following criteria are good candidates for pre-pack administration:
- The company has a reasonable amount of assets, including contracts, that when sold, can raise a sufficient amount of cash to pay creditors.
- The company has no options that provide a better outcome for creditors, such as liquidation or a Company Voluntary Arrangement, than pre-pack administration.
- The company is insolvent by either cash flow or balance sheet insolvency, and can’t recover, either through an alternative insolvency procedure or through an emergency financing solution.
- The party buying the company’s assets, whether it’s the company’s directors or a third party, needs to pay a fair market price for the assets, as determined by an unbiased professional.
How and by whom are your company’s assets valued?
An important step in pre-pack administration is determining which company assets are for sale and which are not. This is particularly important if your company plans to sell its assets to a third party instead of a company that’s owned by its directors.
Prior to being sold, your company’s assets will be independently valued to calculate their market value. The purchaser will need to pay a fair market price for the assets equal to or greater than the amount generated through a liquidation sale.
Your company’s assets will be sold through a contract of purchase. This is presented to your company’s creditors through the court, ending administration by providing cash from the sale of the company’s assets to pay creditors.
How much does it cost to purchase company assets?
Are you considering purchasing your company’s assets through a new company and continuing to trade? The amount you’ll need to pay for your company’s assets varies based on the market value of the assets.
By law, you need to act in the interests of your creditors if and when your company becomes insolvent. This means that your company’s directors need to purchase the company’s assets for a price that reflects what can potentially be generated at sale.
Since your company’s assets will be valued independently, there’s no need to worry about issues due to underpaying or overpaying for assets in a pre-pack sale.
Is pre-pack administration more expensive than administration?
Although pre-pack administration involves significant costs, particularly related to purchasing the insolvent company’s assets, it’s almost always a cheaper option for insolvent companies than standard administration.
In administration, which is also referred to as trading administration, the process of administration can take several months. This often results in a significant financial burden for the distressed company that worsens the financial position of creditors.
In contrast, a pre-pack administration sale can be completed within several weeks of the company becoming insolvent. This provides creditors with cash in a shorter period than administration or liquidation, all the while preserving the business.
Get expert financial help
Is your company insolvent and in need of help? If your business is fundamentally sound but needs to escape from excessive debts and contracts that have put it in a difficult position, pre-pack administration could be its best option.
Although a pre-pack administration sale will result in your company closing, it can provide continuity by allowing you to continue running the business through a new company while raising cash to pay creditors.
We have extensive experience with pre-pack administration and can provide expert help regarding your company’s options. If other solutions are more suitable for your company, we can take swift action to create the best possible outcome.
Contact us to speak to an insolvency expert and learn more about how you can use pre-pack administration to preserve your business. We can review your company’s finances and provide the advice and assistance you need to make the best decision.