Pre-Pack Administration

How can we rescue your business? 

We can offer a full range of services including: business restructuring and refinancing, employment advice, business strategy, and cash advice.

Running a business and trying to survive in this market is difficult and can be emotionally and physically draining. We are here to help you by providing information to restructure your business for you to return to profitability and beef up your cash reserves.

We are able to discuss the following options with you depending upon your businesses needs.

1. Pre-pack Administration

We can offer a full range of services including: business restructuring and refinancing, employment advice, business strategy, and cash advice.

Pre-pack administration is an insolvency procedure where a company sells its assets to a buyer before appointing an administrator to complete the sale.  This can be done quickly, and is known as a pre- pack sale. This is called an insolvent company’s arrangement of the sale of its assets prior to the appointment of an administrator.

The company may decide to sell its assets to existing directors and creating a new company (Newco). This can happen when the business is under financial pressures and facing creditor threats. Often, the buyer will be the existing company directors, who form Newco, the new LTD company. All of the assets of the old company must be sold at a fair price and for the old company’s creditors’ interests.

SIP 16 states that the sale of the assets should have been independently valued and a reasonable, fair commercial price paid; and the funds to be paid representing the purchase monies for the former company must come from ‘outside’ of the company, that is to say, paid personally by the purchaser. The newly appointed insolvency practitioners acting as administrators will need to approve the sale.

The new company will need to be viable and have funding in place so it can buy the assets from the old company. If the former company has been threatened with a winding-up petition, a pre-pack administration may be a solution. However, if a petition has already been issued against the company a pre-pack administration is not possible.

If you are experiencing the following hardship, you should immediately speak with ourselves as expert insolvency solicitors about the company’s financial circumstances and options:
  • HMRC payments for PAYE and VAT falling behind
  • The bank or trade creditors sending warning letters
  • Directors worried about wrongful trading and personal risk
  • Business contracts and employees demanding payment 
  • Landlord threatening forfeiture and claiming arrears of rent

Advantages of pre pack administration

  • Speed – The pre-pack can be arranged quickly
  • The debts of the original company are ring-fenced and so the new company does not take over the old company’s debts;
  • Continuity for suppliers and customers alike;
  • The costs are usually a lot less than administration;

Dangers of pre pack 

  • There is no court process. This means creditors’ interests may be overlooked;
  • The same directors can run Newco via a pre-pack. 
  • The company reputation may be affected if suppliers believe the due process was not followed appropriately
  • Newco may be seen as ‘Phoenix company’ a company fraud on the creditors with the company assets being sold at below market value often to a connected party the same directors).
  • The fraudulent phoenix company will often set up overnight using the same name and same directors.
  • Under section 238 of the insolvency act 1986 the directors have a duty to minimise the loss to creditors.  The selling of assets at an undervalue to a connected party therefore calls this into question and could be the subject of subsequent scrutiny being called for by affected creditors.
  • When a company becomes insolvent the director’s responsibilities are to the creditors and ensuring their creditor interests are a priority. Does this happen in practice especially if the assets are sold at below market value?
  • Director can abuse this procedure by setting up a new limited company provided they are not bankrupt or disqualified from acting as directors and they may even buy the assets of the old company including buying the use of the same name. Many creditors find this to be unpalatable.
  • If the correct procedure is not followed the Insolvency Service could prosecute directors. 
  • A creditor of the old company could complain about the pre pack sale.

Pre-pack Guidance

An insolvency practitioner will investigate the company’s financial situation before exploring company voluntary arrangements (CVA), sales, administrations, creditors voluntary liquidations, refinancing and pre-pack administrations.

If the directors of the company choose to enter into a pre-pack administration, advisors will be appointed to access and aid the business for rescue and turnaround.

A business plan will be created for the new company included in the pre-pack administration documentation.

The business plan will include important information regarding profit and loss, cash flow and balance sheet forecasts, which will show relevant capital requirements to run the new business.

However, if the directors wish to sell the business to an existing trading company, the Insolvency Practitioner will need management accounts for the buyer to show that it can sustain trade after the prepack sale.

Address and compliance issues

The pre-pack administration regulations require the Insolvency Practitioner to send sales memos to potential buyers by publishing this information on a wider platform such as, the local newspaper or a website. If the company does not receive any interest, they may choose to sell the business to a new company or a third party. However, if there are several interested parties, such as competitors, this will leave directors in an uncertain position. The directors intending on pursuing this process will need to obtain formal valuations of the company’s assets, property and goodwill as the new company will need to consider these valuations before making a decision on whether to purchase the company. If a director is interested in buying the business, they should be made aware of their fiduciary duty of care to the company’s creditors. Starting a new company will most likely put directors at a risk of conflict of interest and therefore careful consideration and advice is needed.

Financing and Acquisition 

The acquisition of the company assets and business will need to be funded. There are lenders available that will be able to provide asset-based lending, loans and bank facilities. Lenders will require information regarding the business plan in order to be confident before lending.

Personal guarantees may also be required from directors of SMEs however; you will be advised whether this will be necessary due to recent changes and budgets available to SMEs. (See Refinancing for more information)

Flow Chart Explaining Pre-Pack Administration

Please call or email us for a free initial confidential discussion

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