Why rescuing value for creditors and securing the future for directors can really be a win-win.
A Pre-packaged administration or pre-pack, is a sophisticated and highly effective company rescue process.
Pizza Hut is only the latest example of a business using the procedure to keep operating while transferring to new ownership.
It stands out as an effective and unique form of company administration where the sale of all or part of a company’s business or assets is negotiated with a purchaser before the formal appointment of an administrator. The sale contract is then executed immediately upon the administrator taking office, or very shortly afterward.
A pre-pack has advantages for all stakeholders, often representing the best method for extracting value from a difficult situation. This procedure allows the business to continue operating as a going concern, while simultaneously allowing the insolvent corporate entity to legally write-off its debts and liabilities.
Uninterrupted trading: the advantage of speed
One of the most significant benefits is the rapid and seamless continuity of business operations.
Because the entire transaction is pre-negotiated before any formal administration commences, the sale can be undertaken quickly. This speed is crucial, as it reduces the likelihood of losing important contracts, customers, and key employees.
In most industries, any break in trading will inevitably harm the business. The quick completion inherent in the pre-pack model facilitates a relatively smooth transfer, ensuring business operations are not interrupted or detrimentally affected by the financial distress of the previous entity.
Instantaneous transition allows the new company to keep running as smoothly and normally as possible. Furthermore, once the administration order is made, the company is protected from creditor actions while the assets are sold, preventing secured creditors from enforcing a charge against the company’s property and helping the company avoid winding-up petitions or compulsory liquidation.
Maximising asset and brand value
The second major benefit of a pre-pack deal lies in its ability to preserve and maximise the value of the company and its assets.
Public news of financial difficulties or the appointment of an insolvency practitioner can cause customers, suppliers, and employees to lose confidence and begin to look elsewhere, leading to a detrimental reduction in the business’s value.
By completing the sale before the insolvency news reaches wider audiences, the pre-pack minimizes the risk of this value diminution.
A crucial part of the value preserved is the business’s brand integrity and ‘work in progress’. Since the sale is negotiated while the company is still a going concern, the assets are often sold at a higher price than they would be in a conventional, slower, or liquidation-based process.
Administrators aim to realise the assets to provide the best outcome for creditors. By preserving the “goodwill” (such as the company name, website, and brand), the pre-pack process achieves a better result for creditors than would be possible if the company were simply wound up and assets realised afterwards.
Protecting jobs and reducing costs
Pre-pack administrations are highly effective in preserving jobs and minimising costs associated with a company’s failure.
- Job Preservation: Job losses often occur when companies cut costs or reduce trading operations during insolvency. By securing a rapid sale to a buyer (who may often be the existing management with knowledge and affinity for the business), employment continuity is ensured. Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), all employees and the liabilities attached to them automatically transfer to the purchaser. This avoids redundancies and secures continued employment, which benefits the overall body of creditors by reducing the number and value of preferential and unsecured claims in the insolvency.
- Cost Efficiency: The expenses associated with trading a business through a prolonged administration process can be significant. In a pre-pack, control, risk, and costs are transferred to the purchaser immediately or shortly after the administrator’s appointment. The purchaser takes over the premises, often through a license to occupy, while negotiation for a formal assignment continues. The administrator can also reduce associated administration expenses by not having to fund a lengthy marketing and sale campaign, especially if a genuine buyer is already lined up. Consequently, the costs of a pre-pack administration should be lower, leading to a greater eventual return for creditors. Creditors are also likely to receive dividends in a shorter timescale.
Pre-pack administrations have previously faced specific criticism regarding transparency, especially when the sale is to “connected parties” (such as existing directors or shareholders) but new regulations have been implemented to increase scrutiny and restore creditor confidence.
The introduction of measures like the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 mandates that sales to connected parties within the first eight weeks of administration must obtain either creditor approval or a report from an independent evaluator.
This move, which often involves getting a qualified valuer to report on the sale, ensures transparency, clarity, and trust, ultimately codifying best practice into law.
Pre-pack administrations provide a formal, legal framework for business rescue.
By prioritising speed, maximising value, protecting jobs, and minimising costs, it stands as a useful and valid insolvency tool that ensures the best possible outcome for the business, its employees, and, critically, its creditors.
If your business is facing financial difficulties and administration sounds like it could pave the way for a successful recovery then get in touch with us today.