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Administration is a formal insolvency process that puts a company under the
control of an external administrator to see if the company can be rescued and
if the owners can turn things around. Alternatively a pre-pack sale can often be
arranged if it is the best outcome for all parties.

Administrators can be appointed by directors, shareholders or even floating
charge holders and other creditors. The administrator’s job is to protect their
interests and if the business can’t be saved, will close it and look to sell company
assets to obtain the best value for creditors.

Pre-pack administration: what is it?

Pre-pack administration is an insolvency process whereby a financially distressed company employs an insolvency practitioner to prepare the business and its assets for a sale to take place, as soon as reasonably practical after the business enters formal insolvency.

The name pre-pack comes from the fact that any marketing and most of the sale terms are agreed in advance of the formal insolvency.

What does pre-pack mean?

In the past, the term related solely to the administration insolvency procedure. However, more recently, pre-pack can refer to any pre-packaged insolvency sale. In fact, the process is more commonly  used via liquidations than administration.

As pre-packing has become more widely used, it has generated media coverage and gained some negative connotations. It has been criticised as lacking transparency and excluding creditors from the decision making process. That being said, it has remained a popular and highly effective insolvency mechanism for businesses.

Pre-pack creates a seamless transfer of assets and employees. Furthermore, because it allows for continuity, it reduces redundancy requirements and so keeps a higher value in the business.

Ultimately, this generates a higher return of funds back to creditors than if the company were to shut down.

How does a pre-pack work?

Pre-packing can only be carried out by a licensed insolvency practitioner. It is a formal insolvency process and such, there are ethical and practical guidelines that the insolvency practitioner must follow to ensure that the process is fair to all stakeholders.

Anyone can purchase the assets of a company in a pre-pack. However, most businesses have a higher value to their current management. As such, most pre-packs tend to lead to a sale to an entity that is reformed from the previous company management.

A typical sale usually includes the transfer of any work in progress, goodwill (such as the name, website and brand), physical assets and employees. The value of any sale of the assets will need to be recommended by an independent valuation agent.

Under a pre-packed sale, employees’ rights are deemed to have transferred with the sale.

What does a pre-pack cost?

Our fee for a pre-pack is the same as our fee for liquidation.  To get a quote, complete our online liquidation fee calculator.

If you are considering whether a pre-pack is suitable, and you are also intending on buying back the business, you’ll need to bear in mind that the sale cost will comprise of the following:

  • Physical assets
  • Work in progress and goodwill
  • Other assets
  • Assumed redundancy costs

Furthermore, outstanding debtors do not usually form part of a sale, so you will also need to consider working capital requirements.

There are funding options available, which may be able to assist.

Prepacking: answers to the most asked questions by directors

To help you understand some of the practical implications of pre-pack administration, we have compiled a list of the questions directors most commonly ask us here so you can get your prepacking answers.

Is prepacking legal?

Yes. It is a legal process that ultimately saves jobs, and assists the UK economy. There are regulations and legislation that must be complied with, and you must employ a licensed insolvency practitioner to carry out the formal insolvency.

If you’d like to discuss this in more detail, or you’d like to find out how pre-pack might work for you, contact one of our business rescue experts.

How much does a prepack cost?

Use our Quick Business Review to get an estimate of the fees (our fees for prepack are the same as our fees for liquidation). If your assets are worth materially more than the fees, then you will only need to pay for the assets of the business, and our fees will be drawn from this.

It may be possible to make part of the payment spread over a period of time.

How are the assets valued?

Independent valuation agents that specialise in sales of assets and businesses of insolvent companies will value the assets.

Are the assets marketed for sale?

Only if the type of assets warrants it. For small value asset sales, it is not usually cost effective, nor prudent to place the assets to the open market, as long as a fair value offer has been received in advance.

Can I re-use the company name?

Yes, but you must purchase the company’s ‘goodwill’ in order to do.  The new business will also be required to comply with obligations to provide notice to creditors of the transfer. There is more information on the process here.

Can my offer to buy the assets be rejected?

The independent agents will only reject your offer if they believe more could be achieved on the open market. However, they are fair minded and pragmatic. If you feel that your offer is representative of the true value, you will have an opportunity to explain why and negotiate directly with the agents.

You do not need to proceed with the formal insolvency until you have reached agreement on what happens with the assets. This way you can avoid any potentially unexpected outcomes.

What happens with the employees in a prepack?

In a prepack, if the sale is agreed pre-formal insolvency, then all employees rights transfer across to the new business. For employees, this means that their entitlements such as holiday pay and accrued redundancy transfer with them. For the employer, this is an accrued extra cost that needs to be factored into their financial planning.

However, if the company enters liquidation first and then agrees a sale, it is possible that the staff are not automatically transferred, and may be able to claim from the national insurance fund. This is a complicated issue, and expert advice should be sought as part of the planning process.

Can I stay in the company’s existing premises?

This will depend on the type of lease the company operates, and any negotiation with the landlord.

Is there funding available to assist with the asset purchase?

Yes. We are happy to point you in the direction of funders who can advise.

If you’d like to discuss this in more detail, or you’d like to find out how pre-pack might work for you, contact one of our business rescue experts.

Frequently Asked Questions about Administration
Will creditors still be able to chase me for repayments?

No. Administration provides an automatic moratorium preventing creditors from taking further enforcement action so it provides a necessary breathing space.

Does administration provide a better deal for creditors than liquidation?

Generally, yes. Administration will usually provide a better return for creditors than liquidation because the business will either make profit from continuing to trade or if it is sold as part of a pre-packaged administration then the value of assets will be protected.

Is administration free?

Costs can vary regarding the complexity of the process but a pre-packaged administration is highly regulated, as a sale should represent the best value for creditors.

Can I continue to run my business myself?

No. Once a notice of appointment is filed in court, control of the company passes to the administrator even if the longer term aim is to enter a CVA.

After administration will control of my company revert back to me?

Possibly. If the business emerges from a CVA then it will. If the administrator eventually has to sell the business, the previous management will have an opportunity to buy it, although they will have no input into the sale process.

Will directors be interviewed if the company goes into administration?

As part of the administration process, the insolvency practitioner is obliged to examine and report on the actions of directors leading up to the administration.

This is usually a straightforward process to determine that all affairs have been handled properly. It is possible, but rare, that if a director is found to have acted improperly then they could be disqualified from being the director of a limited company for a period of time and/or face a fine too.

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