Pre-Pack Administration Advice for Directors and Stakeholders
- What is it?
A Pre-Pack Administration enables business continuity. Often a new company “New Co” is set up (normally) by the same directors as the old company “Old Co”. The New Co effectively starts trading the same business but starts off with a clean slate, i.e. no debt.
There are strict rules surrounding Pre-Packs and directors and the proposed administrator need to communicate with each other and both need to be comfortable that one of the required objectives of administration can be met.
- How does it work?
An administrator can either be appointed by a secured creditor or by the company/ its directors. Prior to the company entering administration the business and its assets need to be valued. A buyer for the business is then sourced, in many cases this is the New Co that has been set up by the same directors as the insolvent company. On the appointment of administrators, the legalities are finalised and the sale completes. Following the successful conclusion of a Pre-Pack, the company will then be liquidated then dissolved or just dissolved.
- Pros for Directors
- It can help avoid their company being wound up by a creditor
- Continuity of trade/business
- All of the business’ debt is written off, and all of the future trade is conducted by the New Co
- New Co is not obliged to take on costly or unwanted contracts or operating leases that Old Co was party to
- Cons for Directors
- Some existing - or potential - new clients, may take a negative view of the fact business is now traded by a New Co following Old Co’s administration
- Although unwanted service contracts and operating leases don’t need to be taken on by New Co, all staff contracts and accrued rights/ privileges must be transferred to New Co under the "TUPE" regulations (see Transfer of Undertakings - Protection of Employment)
- The conduct of directors will be investigated
- The business has to be marketed by the proposed administrators to see if there are parties other than the directors who are interested in purchasing. However, given the limited timeframe such parties have to carry out due diligence, raise funds and subsequently agree a deal means this exercise very rarely attracts anybody that is not already connected to the business.
- Is it for me?
A Pre-Pack is a procedure that facilitates business continuity, enabling New Co to acquire the assets of the business such as machines, equipment, vehicles, contracts, work in progress etc. without having to take on debts or continue to maintain unwanted contracts, operating leases or agreements. There are strict rules in place surrounding Pre-Packs, so it is important a full financial review is undertaken to establish whether it is the right course of action.
Depending on the circumstances, a CVA or Creditors Voluntary Liquidation may be more appropriate, going down these routes can also enable business continuity and naturally come with pros and cons compared with a Pre-Pack.
