A Pre-pack is the sale of some or all a distressed company’s business and assets to a new owner after the formal insolvency process, however on terms negotiated and agreed before the insolvency process has commenced. Therefore, it will already have been identified that the business is insolvent and cannot continue trading. If the directors did continue trading, knowing that it is insolvent, they would run the risk that they may be liable for the company’s debts.
As a specialist form of administration, pre-packs are a technique designed by insolvency practitioners to help preserve goodwill and going concern enterprise value in distressed businesses. Prior to this, the options of the business will have been explored and considered. This will include:-
- A Company Voluntary Arrangement, which is an agreement with the creditors to ‘ring-fence’ the debt allowing the company to make a contribution to these from its future profits over a period of time (usually 3 – 5 years). An Insolvency Practitioner will be appointed to monitor the arrangement.
- Liquidation – formally winding the company up, this will involve a liquidator being appointed to realise the assets and use any funds to discharge their costs and any surplus monies would be available to creditors (in a certain order of priority).
- Pre-pack Administrations can be used where a CVA is no longer working for the company and they are no longer in a position to continue paying the monthly contribution. They are also used when a company has attempted to secure finance or a purchaser of the assets, but due to the level of debts it carries and falling profitability, it is not viable.
Who benefits from Pre-pack administrations?
The key benefit of a pre-pack administration is the business or assets are sold to a pre-arranged buyer prior to the administrator being appointed. For employees, this means their contracts are transferred over to the buyer, saving jobs and placing any claims the employees have under the buyer instead of the company.
The landlord will normally benefit from the occupation of the leasehold premises by way of a license or may surrender the lease and grant a new one to the occupier. Not only does this allow the landlord to benefit from future rental on the property, but it also mitigates the landlord’s claim, in most cases significantly reducing it.
With a pre-pack administration, customers benefit from limited disruption as the purchaser will normally purchase the order book and work in progress on any contracts. The customer is therefore likely to receive the product or service they signed up for with minimal disruption, the choice is theirs. The purchaser will also benefit by having instant customers.
If the order book and work in progress was not purchase out of insolvency, it would be abandoned and it would be usual for customers to claim for breach of contract. The creditor’s claims
in this case would increase significantly.
When it comes to benefits and losses, there are more losses for suppliers when a company agrees to pre-pack administration. Not only it is uncertain whether they will or will not receive a dividend from the insolvent company, they may have also permanently lost one of their main customers and their revenues may fall as a result. The purchaser of a pre-pack may wish to start a new account, with terms to suit the supplier. Suppliers usually ask for payment up front until a relationship has been established.
A pre-pack administration can lead to more money in the pot to share between the creditors. Whilst there is a myth that pre-pack administrations involved the sale of the business assets at a knocked-down price, this is not the case. In reality, the administrator will achieve a better understanding as the assets will be sold in-situ, an amount for intellectual property may be gained and generally book debts are easier to collect if there is continued service/supply. If assets were sold by the administrator at a knocked-down price, they would be held personally liable.
Pre-pack administrations are not for everyone. The process can be quite complex with many rules and regulations surrounding it, making it not always a viable option. However, in the right circumstances there is still a very important place for them. It is important that a pre-pack administration is only considered if the administrator believes it is the best option and will achieve the best results for the company’s creditors.