Pre Pack Administration

Pre-Pack Administration. Written by: John A Waller. Consultant. Reviewed July 14th, 2024.

A pre-pack administration is an agreement in which the sale of a business, either as a whole or part of its assets, is negotiated before the appointment of an administrator. The sale contract is executed shortly after the administrator’s appointment. This process provides a fast and efficient way to sell a company’s assets and is an alternative to the lengthy and complex creditors’ voluntary liquidation process. It’s important to note that pre-pack administration is part of an insolvency process, and only a licensed insolvency practitioner (IP) can legally act as the company administrator. This approach offers significant benefits, but it’s crucial to remember that pre-pack administration remains part of an insolvency process, and only a licensed insolvency practitioner (IP) can act as the company administrator.

Pre-pack administration advantages?

The advantages of a pre-pack :

  • Maintain continuity of the business as a going concern;
  • Preserves asset values;
  • Adverse press then subdued;
  • A better outcome for Creditors;
  • Job protection.

Objectives of an Administration

  • Save Jobs
  • To enable a distribution to preferential and or secured creditors by selling company property
  • Better results for creditors

Are existing/former directors able to be part of a pre-pack?

Yes.

Third-party or existing directors may purchase the business’s assets and then operate in a new company.

When does a Pre-Pack Administration Remain Appropriate?

A pre-pack administration remains the best option for more substantial companies. The procedure often involves more time and higher costs. When a company remains under attack by its creditors, this affects its viability and ability to operate. Suppose an essential creditor supplying primary materials ceases providing your company over non-payment. Then, the creditor proceeds to issue a winding-up petition.
What can company directors do?
Firstly, is it possible to pay off the debt? If not, will the business have a future if the debt can be handled in administration? If so, consider a pre-pack administration.

How long does pre-pack Administration take?

A pre-pack administration is a swift insolvency process, as negotiations and marketing occur before an administrator is appointed. Usually, the pre-pack sale takes about 4-10 weeks¹; however, the duration varies due to the intricacy of the deal.

Why are pre-pack administrations an issue?

The finances and funding for the purchase must be in place before going ahead with a pre-pack administration., the need to adhere carefully to phoenix regulations, and the possibility of negative publicity.

Why then Pre-Pack before the Appointment of An Administrator?

Doing this before their appointment offers employment protection by transferring undertakings and jobs, preserves asset values, and sustains business momentum.

Assets will then be transferred to a newly formed company, ensuring trade continuity.

Pre-Pack Administration Process.

You must meet many conditions for a pre-pack process to commence. No creditors’ meeting is called until the sale of assets is complete.

The potential insolvent company starts the insolvency process. It will have the assets valued and then prepare a company’s statement of affairs. So this will include a complete list of company assets and any debts the company may have. The business requires valuing. Therefore, ensure you 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? Thus, ensure you seek early advice from the appointed administrator—voiding accusations of wrongful trading.

Please note that a pre-pack administration exists to sell ASSETS, not COMPANY.

For further help on a Pre-Pack, contact HBG Advisory and click on MEET THE TEAM AT HBG ADVISORY for our business recovery and rescue experts.

Qualifying Evaluator’s Report 

In April 2021, obtaining a Qualifying Evaluator’s Report before selling a business or its assets to a connected person within eight weeks of entering administration was made compulsory. The only exception is if the administrator has obtained creditor approval for the sale. The purchaser is responsible for getting the qualifying report, not the administrator’s job. 

Pre-Pack Administration And The Pre-Pack Pool?

The pre-pack pool remains an independent body that gives an opinion on purchasing a business and its assets by related parties, where a company goes into Administration and the proposal of a pre-packaged sale.

Their aims:

  • Increase transparency of the process before completing a pre-pack when involving connected parties;
  • Protect creditors that independent business experts have reconsidered the intended transaction.

What ethical issues exist with a pre-pack?

  • Directors involved?

The presence of the directors of the company during a pre-pack can create many concerns and worries for creditors.

Given that the former directors have left the previous creditors unpaid, it seems only natural that their involvement would attract criticism from creditors when the former directors now have a new limited company trading vehicle.

  • Little, if any, transparency

The importance of transparency in a Pre-Pack cannot be understated. Without collateral, creditors usually worry they will not be repaid.

  • How do assets attain valuation?

Professional valuation of assets backed by indemnity insurance remains required. Non-qualified valuations remain prone to criticism and often generate little or no return for company creditors.

  • Lack of marketing

A lack of open/efficient marketing has also been a cause for concern. Has there been any transparency in marketing the business? The insolvency practitioner negotiates and agrees to sell business assets before their official appointment as administrator. The deal then takes place quickly to preserve value.

  • Future Going Concern, Concerns?

The company may express concerns about the viability prospects of the new company after the pre-pack Administration. What remains different moving forward? Perhaps a replay?

Retention of the title of stock

It remains essential to consider any retention of title claims when considering a pre-pack administration.

Improving trust in the process of pre-pack

So, in November 2015, the Insolvency Service added amendments to strengthen the Statement of Insolvency Practice 16 (SIP 16) to generate faith in pre-packs.

SIP 16 guides UK-licensed insolvency practitioners engaging in a pre-pack administration. They remain through guidelines; however, IPs may have regulatory issues if they step outside. 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 legitimate, open market value placed on company assets to date? s239 Preference under Insolvency Act 1986
  • Every general consideration was explored and documented: A pre-pack may only happen if it provides a higher return for the company’s creditors.
  • Marketing remained effective: when you market the business, many potential buyers receive information about the sale, giving reasonable viewing time and information for consideration. If this was not the case, what is the practical reasoning for why?
  • How company assets remain valued independently: the basis for valuation and details of the valuer (including their professional qualifications) need to be emphasised.

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 for struggling companies, while once restructured a viable business, maintaining jobs and hopefully profit.

Increased Rules for Pre-Pack Administrations

Many parties have little or no trust in Pre-Pack Administrations.

So much so that 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.

Changes. 

Newly proposed regulations

The proposed changes remain directed at pre-pack administrations, though they don’t only affect pre-packs. 

Affecting any deal of the company’s business or assets directly to a connected party within eight weeks of an administrator appointed at the company. The appointed administrator requires the company’s creditor approval or formal written consent from an independent opinion to approve a pre-pack to a connected proposed purchaser. 

Reliance lies on the proposed connected party purchaser to initiate the production of a report. By whom, though? Perhaps someone “maintains they have the expertise and skill to produce the report.” However, this is controversial, as no clear guidance exists, thus doubting the report’s integrity.

Obtaining independent written opinion ensures the evaluator’s report either verifies the sale amount and confirms it or challenges it. The appointed administrator must review it but not act on it. However, if the administrators proceed with a deal despite the report recommending not to, the administrator must explain why!

All creditors and companies’ houses must receive a copy of the report. 

What improvements does the Government expect to achieve?

This would change the perception of pre-pack delivery for good, enabling companies to have a fast, cheaper option while protecting jobs and improving returns for former creditors.

Generally, the public opinion of pre-packs remains that IPs and the proposed buyers or former directors potentially cooperate to the detriment of the creditors. This attitude remains the same as of the time of writing this page, despite the attention that pre-pack sales produce. The most favourable price achievable may be due to natural resentment when suppliers and other creditors remain unpaid.

Restructuring professionals remain aware of pre-pack deals’ impact on stakeholders and companies’ creditors. Historically, pre-pack misuse has existed, especially in transactions that passed value onto parties connected to creditors.

Parties managing the sale remain regulated professionally and form no beneficial group, thus remaining objective while agreeing on the outcome.

The company’s creditors will remain concerned about the process and have little faith in its financial outcome for their benefit.

Pre-Packs remain not widely known until actioned, perhaps one of the main unsettling matters creditors remain uncomfortable about.

The proposed changes remain designed to improve the transparency of the process and increase confidence among all parties to a pre-pack. This would allow a pre-pack to continue to be a highly effective tool for helping company turnarounds speedily while protecting jobs and maximising returns for creditors.

Will the submitted changes have a positive or negative impact on pre-packs?

The UK Government has revised the handling of pre-packs , paying particular attention to how the public is assured of transparency and instilled with confidence.

First, note that the proposed 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 if you later receive challenges. Directors benefit from the report, which supports an opportunity to demonstrate an independent inspection of the proposed deal.

For the company’s creditors, changes remain aimed at bolstering confidence in the process by their association with the sale. In reality, it is doubtful if it is employed to support the independent opinion; otherwise, there would be uncertainty, and the issue of convening a creditors’ meeting would arise. Therefore, creditors expect to 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. It was made more damaging by the knowledge that more than one report could exist to find a favourable analysis which wanted to support the deal pass through.

So, hoping for a favourable report party by the prospective party must be checked. IPs must reject any transaction if aware of disadvantageous reporting. Any multiple reports produced are required to be filed at Companies House and copied to the company’s creditors. Furthermore, despite the adverse report, the administrator must support the negotiation.

How will changes impact 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 require preparatory work to obtain an independent opinion (An as yet known procedure). Who will implement such a report?

Quick evaluations and reporting remain crucial, enabling and not impeding a profitable sale. However, regulations only affect sales when connected parties remain concerned, resulting in fewer deals with related parties and likely weaker realisations.

Additionally, how will and by how much will the independent evaluator be remunerated?

However, the connected party buyer will receive the report. 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.

The Coronavirus COVID-19 Pandemic has prompted several new UK insolvency reforms. Anxieties regarding pre-packs, though, have remained for many years. The proposed changes, though, hopefully will bolster confidence in their use. Pre-packs, though, require IPs and valuers to act honestly while adopting high professional standards, assuring former creditors of openness and the best return for them.

TUPE: Pre-Pack Administration

The Transfer of Undertakings (Transfer Undertakings Protection of Employment) regulations, or TUPE, protect employees’ contracts when they move from one company to another.

TUPE remains strictly adhered to and is the responsibility of company directors, so they need to be aware of it.

Jobs usually remain preserved with a pre-pack. Redundancies sometimes remain necessary, and the way you administer them remains crucial. You must comply with TUPE regulations to avoid potential claims of unfair dismissal.

Under SIP 16, insolvency practitioners must follow stringent rules to ensure transparency in the transaction process under pre-pack.

Does the pre-pack Administration suspend or interrupt business?

No.

Pre-pack Administration remains a legally complex process. However, little disruption occurs to the progress of the insolvent and the new company, making it a seamless business transfer.

This occurs because even assets, such as work contracts—for example, contracts for specific services that were only 50% complete at the time of the previous company’s insolvency—can be purchased and transferred to the new company.

Existing Directors

Other factors will determine whether directors from the old company transfer to the new one, depending on who purchases the assets. This is because of a sale of assets, not the business.

Preferential Creditors

Preferential creditors, such as employees for arrears of pay and holiday pay and HMRC (from December 2020), may receive a total dividend in nearly all administrations. In a pre-pack administration, employees who remain are transferred to the purchaser. Thus, little, if no, preferential claims are made.

Unsecured Creditors

Unsecured creditors sometimes receive a dividend under the “prescribed part”, though no dividend exists unusual.

Order to repay creditors in Administration (When Insolvent)

  1. Bank holding a fixed charge
  2. Appointed administrator’s fees
  3. preferential creditors
  4. Any secured creditors (floating charge).
  5. Lastly, unsecured creditors

Can a Pre pre-pack sale be challenged?

Yes!

Suppose the company’s creditors have concerns that the pre-pack dale return stood low. Then creditors may seek legal action. Courts have demonstrated they will intercede if they feel deals have been done that creditors have lost.

Therefore, the IP must act carefully and demonstrate transparency when dealing with a pre-pack administration.
HBG Advisory may help you remain compliant and avoid fines for failing to comply.

Hoping, therefore, to remove stress, having been through a Pre-Pack Administration, view Flyingeese.

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