The Rules, Requirements and Advantages of Pre-Pack Administration
- What is pre-pack administration?
- What are the requirements for pre-pack administration?
- What can be preserved using pre-pack administration?
- Does pre-pack administration delay or interrupt business?
- Is pre-pack administration suitable for your business?
- Learn more about the pre-pack administration process
Is your business insolvent but potentially viable? If your business has an effective business model but needs to shed debt and other liabilities to become profitable, a pre-pack administration sale could be your ideal option.
Pre-pack administration involves your existing company entering administration due to insolvency. Its assets are then sold on to another company, typically a new company operated by you and other company directors.
This allows your business to retain many of its staff, clients and customers, albeit via a new company. The benefits of pre-pack administration are numerous, including its ability to prevent your employees from being made redundant.
There are detailed rules and regulations surrounding pre-pack administration that make it a legally complex process. As such, you should seek the advice of an expert insolvency practitioner to find out if it’s the right option for your business.
In this guide, we’ll explain the pre-pack administration process, look at some of the pre-pack administration rules and help you work out if pre-pack administration is a viable solution for keeping your business running.
What is pre-pack administration?
Pre-pack administration is an insolvency procedure that lets your business rapidly restructure and resume trading through a “new co” – or new company – after it has become insolvent.
When your business is insolvent, you have a legal obligation as company director to stop trading immediately. You also face a variety of options, including liquidation, a company voluntary arrangement or administration.
Pre-pack administration involves entering your business into administration to sell its assets to another company. This company can be owned by you and the existing company’s other directors, as well as shareholders in your insolvent company.
What are the requirements for pre-pack administration?
There are strict requirements amount which businesses are suitable for pre-pack administration, many of which are designed to reduce the potential for abuse that could exist if company assets are sold below their value to a new company.
- In order to qualify for a pre-pack administration sale, your company’s insolvency practitioner needs to ensure it complies with the legal requirements. These legal requirements include:
- The company needs to be insolvent and unviable. It must have no possibility of recovery, whether through emergency financing or a company voluntary arrangement.
- The new company (typically a company owned by the previous company’s directors) must purchase the insolvent company’s assets at a market price that’s fair to the insolvent company’s creditors.
- The insolvent company’s directors and insolvency practitioner must show that pre-pack administration maximises creditor value and acts in the best interests of the insolvent company’s creditors.
What can be preserved using pre-pack administration?
Typically, the closure and liquidation of a company means the absolute loss of all of the company’s assets. These assets can be tangible items such as property, product inventory, manufacturing equipment and vehicles.
Assets can also be intangible. For example, contracts with specific businesses, clients and customers, intellectual property and business processes are all intangible assets that a company loses during the liquidation process.
Pre-pack administration allows these assets – particularly the assets that are of the greatest value to the business and its directors – to be preserved and sold onwards to the new company.
Employees can also be preserved. One of the most significant benefits of pre-pack administration is that it allows companies to preserve and transfer not just assets, but the bulk of their employees to the new company that has been formed.
Does pre-pack administration delay or interrupt business?
Although pre-pack administration can be a legally complicated process, it rarely results in a significant interruption to the operations of the insolvent and newer companies. In fact, pre-pack administration often results in seamless business.
This is because even assets such as contracts in work – for example, contracts for certain services that were only 50% complete at the time of the prior company’s insolvency – can be purchased and transferred to the new company.
Is pre-pack administration suitable for your business?
If you believe that your company has valuable assets that should be preserved but is burdened by debt and other liabilities, pre-pack administration could allow you the chance to preserve aspects of your business and settling with your creditors.
It’s important to note that there are detailed regulations for pre-pack administration designed to prevent wrongful trading. It simply isn’t possible to dispose of your debt and move on to a new company using the pre-pack administration process.
Our expert insolvency practitioners will be able to look at your company’s situation and determine if pre-pack administration is suitable. Another option, such as a CVA or liquidation, may be a more appropriate option for your company’s creditors.
Learn more about the pre-pack administration process
Whether you need urgent advice to preserve your company’s assets and staff so that you can continue trading in the future or simply want help and advice about the pre-pack administration process, our experienced team is here for you.
We can examine your company’s financial situation and let you know if a pre-pack administration sale could help you. Contact us now for detailed advice about how a pre-pack administration sale could preserve, protect and recover your company.