Do you have a viable business that’s facing creditor pressure? If your company has significant liabilities that make insolvency likely, prepack administration could be your best way of continuing your business while relieving debt pressures. Pre-pack administration isn’t suitable for all businesses. However, if your company has a viable business model and needs to seamlessly continue operating in order to save jobs, pre-pack administration could be the best option for you.
Pre-pack administration – also known as a prepack administration sale or simply “pre-pack” – is a legal method of selling your company’s assets to a new company, known as a newco, in order to continue operating. One of the biggest benefits of pre-pack administration is that it allows you to keep operating, albeit with a new company, even if creditor pressure and limited assets have made your current company insolvent.
What is pre-pack administration?
Pre-pack administration is a legal process that allows your company to sell many of its assets to a third party – often, the company’s directors – when it faces threats to its stability such as demand notices from creditors.
While liquidation results in the end of the company and the sale of its assets in order to repay creditors, pre-pack administration allows the company to transfer many of its assets to a newco in order to continue trading, albeit as a different entity. This allows the company to preserve jobs and continue operating as it formerly did, with the benefit if previous debts being cleared.
In order to purchase assets during a pre-pack administration sale, the former company’s directors will need to raise funds. Since pre-pack administration allows for continuation, it’s a preferred option when compared to liquidation. Using a pre-pack, the company directors can save jobs and avoid losing their company’s assets during liquidation.
Pre-pack administration has a wide range of benefits, particularly for the directors and employees of the former company. Because company directors can buy a lot of the former company’s assets, they can preserve much of their previous business.
As part of a pre-pack administration sale, company directors can purchase the old company’s assets, including equipment, clients, contracts and property. The assets can then be transferred to the newco in order to continue operating.
As well as transferring clients to the new company, pre-pack administration allows the company’s directors to transfer existing employees to their new business. This prevents jobs from being lost during the company’s administration.
Finally, pre-pack administration results in significantly less of an interruption to the company’s normal operations. Although it will operate as a new company, pre-pack administration allows a business to continue operating without interruption.
What are the requirements for prepack administration?
There are strict requirements in respect of pre-pack administrations, many of which are designed to reduce the potential for abuse that could exist if company assets are sold below 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.
- 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 value that’s fair to the insolvent company’s creditors.
- The insolvent company’s directors and insolvency practitioner must show that pre-pack administration maximises asset values and acts in the best interests of the company’s creditors as a whole.
Understanding pre-pack administration regulations
Many company directors wrongly view pre-pack administration as a ‘reset’ button for their company to push if it runs into difficulties. This simply isn’t the truth; pre-pack administration is a process that needs to be in the best interests of creditors.
If your company is insolvent, it’s essential that you act in the best interests of your creditors. Your first course of action when you believe that your company might be insolvent should be to contact a licensed insolvency practitioner immediately.
Companies involved in pre-pack administration sales are subject to the Transfer of Undertakings Protection of Employment (TUPE) regulations. TUPE protects employees in the event of a pre-pack administration sale and must be complied with. It’s essential that you and other company directors comply with TUPE regulations during the pre-pack administration sale of your business.
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.
What can be preserved using prepack 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 a 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 new company. In fact, pre-pack administration often results in a seamless business transfer. 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.