Pre-pack Administration forms part of an Insolvency process. It allows the agreed purchase using a bids process by potential buyers to purchase company assets before entering Administration.
A Licensed Insolvency Practitioner (IP) only may act as Administrator of the company. The appointment of an Administrator then takes place at a point of proceedings, so to, therefore, expedite a sale.
When a Pre-Pack Administration Remains Appropriate?
A pre-pack administration remains appropriate for more substantial companies formally. The procedure often turns out to be an involved process to carry out involving more time required and hence greater cost. When a company remains under attack from the companies creditors, Often this may affect the viability and ability to operate still. Suppose an essential creditor supplying primary materials decides to cease supplying your company over non-payment. Then proceeds to issue a winding-up petition. What then, can directors to do?
Firstly can the pay the debt? If not, has the business a future if the debt can be handled in administration If so, consider a pre-pack administration.
Why Then Pre-Pack before Appointment of An Administrator?
By doing this then before there appointment, it, therefore, offers protection of employment(transfer of undertakings, jobs), preserves asset values and sustains business momentum.
Assets will then transfer to a then newly formed company, and therefore continuity of trade assured.
Pre Pack Administration Process.
For a pre-pack process to, therefore, commence, however. No creditors meeting called until the sale of assets completed.
The potential insolvent company starts the insolvency process. It will have the assets valued and then to prepare a statement of affairs of the company. This details company assets and company debts. The business requires valuing. It is therefore crucial, to ensure you then cross the “T’s” and dot the “I’s” when carrying out a Pre-Pack. Creditors will, however, take careful note of events. Do assets, therefore, transfer at fair value? Therefore, ensure you seek early advice from the to be appointed Administrator—voiding accusations of wrongful trading.
Please note, a pre-pack administration exists, therefore, for the sale of ASSETS and not then the COMPANY.
For further help on a Pre-Pack contact HBG Advisory and click on MEET THE TEAM for our business recovery and business rescue experts.
Suitable for pre-pack Administration?
- The subject then to stringent legislation. The officeholder required to demonstrate that the process offers the best outcome for creditors.
Why then a pre-pack administration?
- Preservation of asset values;
- Adverse press then subdued;
- Then enables business continuity;
- A better outcome for Creditors;
- Job protection.
What are ethical issues with a pre-pack?
The presence of the directors generates many concerns with creditors, while the process of a pre-pack happens.
Naturally, their involvement attracts criticism from creditors when the former directors now have a new limited company trading vehicle having just left behind the previous creditors unpaid.
Little if any transparency
Transparency in a Pre-Pack remains vital. Without it, creditors naturally fear the worst.
How do assets attain valuation?
Professional valuation of assets back by indemnity insurance remains required. Non-qualified valuations remain prone to criticism and often generate little or any return for company creditors.
Lack of marketing
Lack of open/efficient marketing has also been a cause for concern. The insolvency practitioner negotiates and agrees on the sale of business assets before their official appointment as administrator. The deal then takes place quickly, to preserve value.
Future Going Concern, Concerns?
Company may show their concerns over viability prospects of the newco set up post-pre-pack administration. What remains different moving forward? Perhaps a replay?
Improving trust in the process of Pre Pack
So to generate faith in pre-packs, the Insolvency Service has added additional amendments in November 2015 bolstering the Statement of Insolvency Practice 16 (SIP 16).
SIP 16 guides UK licensed insolvency practitioners engaging in a pre-pack administration. They remain though guidelines; however, IP’s may have regulatory issues imposed, if they step outside of them. Pre- Packs remain potential minefields for all.
Therefore since the changes, you must ensure you can prove that:
- The basis on which the directors paid a reasonable price for company assets: Was a fair up to date open market value placed on company assets. s239 Preference under Insolvency Act 1986
- Every available consideration was explored and documented: A pre-pack may only happen if it provides a higher return for the creditors of the company.
- Marketing was effective: an extensive array of potential buyers require informing of the sale, giving reasonable viewing time and information for consideration. If this was not the case practical reasoning for why?
- How company assets valued independently: the basis for valuation and details of the valuer (including their professional qualifications) needs highlighting.
The morality of a pre-pack and how the directors exercise their morality during the process. Bring pre-packs high on the concerns of those who have lost money.
Will it happen again?
Indeed, was it planned?
SIP 16 hopefully assures creditors while offering a platform form for companies that have struggled while having once restructured a viable business, maintaining jobs and hopefully profit.
Increased Rules for Pre-Pack Administrations
Many parties have little or any trust in Pre-Pack Administrations.
So much so, the UK Government published draft regulatory changes to bolster confidence.
Published in October 2020 the draft, to be covered under, Section 8 of the Corporate Insolvency and Governance Act 2020 provides the time to approve matters and finalise by 30 Jun 2021 to implement the legislation
Newly proposed regulations
The proposed changes remain directed at pre-pack administrations, though don’t just affect pre-packs.
Affecting directly to any deal of the company’s business or assets to a connected party within eight weeks of an administrator appointed at the company. The appointed administrator requires the companies creditor approval or formal written consent from an independent opinion to approve a pre-pack to a connected proposed purchaser.
Reliance lays on the proposed connected party purchaser to instigate the production of a report. By whom though? Perhaps by a person who “maintains they have the requisite expertise and skill to produce the report”. However, proving to be controversial, as no clear guidance exists, thus, doubting the integrity of the report.
Obtaining independent written opinion, ensures the evaluator’s report either verify the amount of the sale and confirm it or challenge it. The appointed administrator is required to review it though not act on it. However, if the administrators proceed with a sale despite the report recommending not too, then the administrator must explain why!
All creditors and companies house remain required to receive a copy of the report.
What improvements does the Government expect to accomplish?
To change how pre-packs remain perceived for the good enabling companies a fast cheaper option while protecting jobs and improving returns for creditors of the former company.
Generally, the public opinion of pre-packs is that IP’s and the proposed buyers or former directors potentially cooperate to the detriment of the creditors. This attitude remains still, as of the time of writing this page, notwithstanding the attention that pre-pack sales produce. The most favourable price achievable and may be connected to natural resentment felt when suppliers and other creditors remain unpaid.
Restructuring professionals remain aware of the impact pre-pack deals have on stakeholders and the companies creditors. Historically instances have existed of misuse concerning pre-packs, especially transactions which passed value onto parties connected to the detriment financially of creditors.
Parties managing the sale, remain regulated professionally and form no beneficial group, thus remaining objective while agreeing on the outcome.
However, the companies creditors will remain concerned about the process and have little faith in its financial outcome for their benefit.
Pre-Packs remain not widely known about until actioned, perhaps one of the main unsettling matters creditors remain uncomfortable about.
Changes proposed remain designed to assist all parties to a pre-pack, to have greater confidence by improving overall transparency of the process. Allowing a pre-pack to continue to be used as a highly effective tool, to aid company turnarounds speedily while protecting jobs and maximising returns for creditors.
Will the submitted changes produce a positive or negative impact on pre-packs?
The UK Government has revised how pre-packs are dealt with, paying particular attention to how the public remain assured of transparency and instil confidence.
First, note the prosed changes offer positives for the turnaround and restructuring profession.
Changes provide further robust protection from creditors challenges. The independent report (if supportive of the sale) offers administrators documentary confirmation to confirm their determination about a deal.
The report further adds assurance when later challenges are received. Directors benefit also. The report supports an opportunity to demonstrate independent inspection of the proposed deal.
For the companies creditors, changes remain aimed to bolster confidence in the process by their association in the sale. In reality, though, it is doubtful if employed in support of the independent opinion. Otherwise, there is a degree of uncertainty and also the issue of convening a creditors meeting. It remains therefore expected, creditors will have little to no role in the process. Thus confidence may persist low considering the determination will remain executed by professionals, as with the general procedure. Made more damaging by the knowledge that more than one report could, exist to find the favourable analysis wanted to support the deal to pass through.
So looking for a favourable report party by the prospective party needs to be checked. The Insolvency Practitioners needs to reject any transaction if aware of disadvantageous reporting. In the event of multiple reports produced, they then must are required filing at Companies House and copied to the companies creditors. Further, the administrator must support the choice to negotiate, notwithstanding the adverse report.
How will changes impact on speed pre-packs may be concluded?
Speed remains the main draw of a pre-pack deal. Any potential change affecting delivery will negatively impact the process.
Regulation changes need preparatory work to obtain an independent opinion (An as yet known procedure). Who will implement, such a report?
Fast evaluations and reporting remain crucial, enabling not impeding a profitable sale. However, regulations only affect sales when connected parties remain concerned—resulting perhaps in fewer deals to related parties and likely weaker realisations.
Additionally, how will and by how much, will the independent evaluator be remunerated?
However, the report is to be received by the connected party buyer. As an outcome, opinions, though independent, could be open to fault finding parties such as the appointed administrator.
REMEMBER: Changes won’t be known until implemented and practised.
Coronavirus Covid 19 Pandemic has prompted several new reforms to insolvency in the UK. Anxieties regarding pre-packs though have remained for many years. The proposed changes hopefully will bolster confidence in their use. Pre-packs though require IP’s and valuers to act honestly while adopting high professional standards assuring former creditors of openness and best return for them.
TUPE: Pre-Pack administration
The Transfer of Undertakings (Transfer Undertakings Protection of Employment) regulations, or TUPE, therefore, protects the contracts of employees when they move from one company to a new one.
TUPE is strictly adhered to and is then the responsibility of company directors, so they, therefore, need to be aware.
Jobs usually remain therefore preserved with a pre-pack. Redundancies sometimes remain then necessary, and the way you administer these is, therefore, crucial. You must comply with TUPE regulations to, therefore, avoid potential claims of unfair dismissal.
Under SIP 16, insolvency practitioners remain required to follow stringent rules to ensure transparency in the transaction process under pre-pack.
Does the pre-pack administration suspend or interrupt business?
Pre-pack administration is a legally complex process. However, though little disruption occurs to the progress of the insolvent and to be the new company. A pre-pack administration, therefore, offers a seamless business transfer.
This is because even assets such as contracts in work – for example, contracts for certain services that were only 50% complete at the time of the prior company’s insolvency – can be purchased and transferred to the new company.
Dependant on who purchases the assets and other factors will determine if directors from the old company transfer to the new. This is because the assets are sold and not the business as a whole.
Preferential creditors, such as employees for arrears of pay and holiday pay, HMRC (from December 2020), possibly will receive a full dividend in nearly all administrations. In a pre-pack administration, employees that remain are transferred to the purchaser, thus little if no preferential claims are made.
Unsecured creditors sometimes receive a dividend under the “prescribed part” though no dividend it not unusual.
Order to repay creditors in administration (When Insolvent)
- Bank holding a fixed charge
- Appointed administrator’s fees
- preferential creditors
- Any secured creditors (floating charge)
- Lastly unsecured creditors
Can a Pre Pack Sale be Challenged
Suppose creditors of the company have concerns that the pre-pack dale return was low. Then creditors may seek legal action. Courts have demonstrated that if they feel deals have been done which creditors have lost out, then they will intercede.
Therefore, Licensed insolvency practitioners need to take great care and demonstrate transparency when dealing with a pre-pack administration.
HBG Advisory may then assist on remaining compliant and avoid fines for failing to comply.
Looking, therefore, to remove stress having been through a Pre- Pack Administration, view Flyingeese.