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Pre Pack Administration

What is a Pre-Pack Administration?

A “pre-pack administration” is an agreement in which the sale of all or part of a company’s business or assets is contracted with a purchaser before the administrator’s appointment. This type of administration is often used to sell a company’s assets quickly and efficiently without going through the lengthy and complicated liquidation process. The sale contract is executed when the administrator is appointed or shortly after.

Pre-pack Administration, remains part of an Insolvency process. It allows potential buyers to purchase company assets before entering Administration.

Only a Licensed Insolvency Practitioner (IP) is legally allowed to act as the company administrator. The appointment of an Administrator takes place at a point of proceedings so that it can also expedite the sale of the company.

How much does a Pre-Pack Administration cost?

When does a Pre-Pack Administration Remain Appropriate?

A pre-pack administration remains the best option for more substantial companies. The procedure often becomes an involved process, involving more time required and higher cost. When a company remains under attack by its creditors, affecting its viability and ability to operate. Suppose an essential creditor supplying primary materials ceases providing your company over non-payment. Then proceeds to issue a winding-up petition. 

What can company directors do?

Firstly, is it possible to pay off the debt? If not, has the business 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 appointing an administrator. 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?

Some potential disadvantages of pre-pack administration are that the finances and funding for the purchase must be in place before going ahead, the need to adhere carefully to Phoenix regulation, and the possibility that there might be some 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.

For a pre-pack process to commence, you must meet many conditions. No creditors meeting is called until the sale of assets completes.

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? Therefore, ensure you seek early advice from the appointed administrator—voiding accusations of wrongful trading.

Please note that a pre-pack administration exists for selling ASSETS, not the 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.

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.

Suitable for pre-pack Administration?

  • Subject to stringent legislation. The officeholder must demonstrate that the process offers the best outcome for creditors.

Why then a pre-pack administration?

The advantages of a pre pack are:

  • Preservation of asset values;
  • Adverse press then subdued;
  • Then enables business continuity;
  • A better outcome for Creditors;
  • Job protection.

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 some kind of 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 any return for company creditors.

Lack of marketing

Lack of open/efficient marketing has also been a cause of 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?

Company may show their concerns about the viability prospects of the new company post-pre-pack administration. What remains different moving forward? Perhaps a replay?

Retention of the title of stock

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

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 to strengthen the Statement of Insolvency Practice 16 (SIP 16).

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 to date open market value placed on company assets. 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, there were many potential buyers informed about the sale, giving reasonable viewing time and information for consideration. If this was not the case, practical reasoning for why?
  • How company assets remain valued independently: the basis for valuation and details of the valuer (including their professional qualifications) needs 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 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.

changes. 

Newly proposed regulations

The proposed changes remain directed at pre-pack administrations, though they don’t only 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 company’s 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 initiate the production of a report. By whom, though? Perhaps by someone who “maintains they have the expertise and skill to produce the report”. However, proving controversial, as no clear guidance exists, thus doubting the integrity of the report.

Obtaining independent written opinion ensures the evaluator’s report either verifies the amount of the sale 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 report copy. 

What improvements does the Government expect to achieve?

To change how pre-packs remain perceived for good, enabling companies to have a fast, cheaper option while protecting jobs and improving returns for creditors of the former company.

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 still, 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 the impact pre-pack deals have 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.

Changes proposed remain designed to help all parties to a pre-pack to have greater confidence by improving the transparency of the process. Allowing a pre-pack to continue to be used as a highly effective tool to help 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 how pre-packs remain dealt with, paying particular attention to how the public remains assured of transparency and instils 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 when later challenges are received. Directors benefit also. The report 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 in support of 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. 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 needs to be checked. The Insolvency Practitioners must reject any transaction if aware of disadvantageous reporting. If multiple reports produced, they must be required to file at Companies House and copied to the company’s creditors. Furthermore, despite the adverse report, the administrator must support negotiating.

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 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 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. 

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 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, therefore, protect the contracts of employees when they move from one company to another.

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

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 to be the new company. A pre-pack administration, therefore, offers a seamless business transfer.

This occurs because even assets, such as contracts in work – 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

Depending on who purchases the assets, other factors will determine if directors from the old company transfer to the new one. This is because the assets are sold, not the business.

Preferential Creditors

Preferential creditors, such as employees for arrears of pay and holiday pay, HMRC (from December 2020), possibly will receive a total dividend in nearly all administrations. In a pre-pack administration, employees that remain remain 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 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, licensed insolvency practitioners must take great care and demonstrate transparency when dealing with a pre-pack administration.

HBG Advisory may help 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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