When is a Pre Pack Administration the best option?
A pre pack is usually the best option if there is a good underlying business and there is an imminent threat of a creditor taking drastic action like a winding up petition or indeed a cut off of supplies/services which would damage the value and trust in the business. The essential element is finance – someone, usually a third party or connected party such as the current directors, has to be willing and capable of getting finance to buy the business. This insolvency procedure is more common for larger businesses as it is quite expensive and complex.
Pre pack administration is a viable business solution, but as with any venture it comes with its advantages and disadvantages…
Advantages of pre pack administration
- The business continues to operate with no interruptions or destroyed value. Once the plan is ready and a contract of purchase is drawn up, the company is quickly protected by the court. This allows the administrator to sell the “business and assets”. Debts can be written off.
- The process is quick. If everything is in place then a company can be “pre packed” in a day.
- Higher returns for creditors. If the company’s assets are sold with no interruption of business then a higher price is achieved. This means there is more money for creditors than if the business went into liquidation.
- The costs are lower. The process is cheaper than trading administration as administrators do not need to find funding to trade the business and there are less professional fees to pay.
- Directors can keep some control over the business. If the company is sold to people already familiar with how the business is to run, increases its chances of success. Lessons can be learnt to understand where the business failed
Disadvantages of pre pack administration
- The process can generate negative publicity. The directors can be seen to shed liabilities and then carry on as if nothing has happened. Unsecured creditors think they have no say in the process and feel they’ve lost disproportionately
- Company may be sold to a competitor. A competitor is often the most likely buyer as they know the business and will see it as an opportunity to expand.
- Loss or control by the directors as new funders/private equity may insist their removal
- Tupe rules apply. Job contracts have to be carried over into the ‘newco’ under TUPE rules so you cannot shed staff to reduce costs in the “newco”
- The “newco” will need to be funded. If the business is to be sold to a connected party (e.g. the former directors), they will need to fund the acquisition of the assets. These will need to be independently valued to avoid any issues. It is best to consult a specialist funder to help with this part of the process
- HMRC are likely to demand a VAT security deposit. If there is a substantial HMRC debt then HMRC may demand a deposit from the “newco” before they are allowed to register for VAT, as once bitten twice shy! Remember that the business was already insolvent prior to any appointment/reaching an agreement.
- Any transaction to the existing directors or a connected third party need to be “evaluated” which adds time and cost.
