Pre Pack Administration differs from Administration in that the sale of the business and any assets of the company is negotiated before the appointment of administrators and completes either immediately upon, or shortly following the appointment. This differs from the standard process where administrators commence marketing of the business after their appointment.
Assets may be bought by a third party or trade buyer, but it is often the case that directors of the failed business purchase the assets and trade under a new company.
One of the requirements of going down the pre-pack administration route is that it must be in the best interests of creditors and, therefore the proof of the decision-making process has to be made available. Transparency is vital when undertaking the pre-pack process, which is why it is important to seek the services of an experienced Insolvency Practitioner.
- Speed of sale is a major advantage over a pre-pack administration. This often results in higher returns for creditors when compared with alternative routes into insolvency.
- Business continuity and brand image is maintained. Pre-pack administration often avoids the adverse publicity that results when other forms of insolvency procedures are chosen. Being sold as a going concern means that business operations continue largely unabated. The value of work in progress is protected, along with customer goodwill. This contributes hugely to the success of the new company, as well as preventing losses that would adversely impact creditor returns.
- Directors keep some control over the business during this type of administration, which is not the case with other types of insolvency procedure. Selling the business to people already familiar with the processes and procedures of how the business is run increases its chance of success.
- Reduced cost of administration. Due to the speed of a pre-pack administration, the costs involved are often less than if a standard administration procedure had been chosen.
- Directors conduct will be investigated. Once business assets have been sold, it is likely that the old company will be liquidated. The Liquidator has to investigate the affairs of the company and the directors conduct, sending a report on the directors conduct to the Insolvency Service, an executive agency of the Department for Business Innovation and Skills as part of this procedure, detailing the conduct of company directors leading up to the insolvency. Even if these directors have formed a new company, they will still be open to investigation and even prosecution should their conduct be deemed improper.
- HMRC may disallow VAT registration by the new company if misconduct has been uncovered. The newly-formed company may have to pay a bond before they can register for VAT and recommence business.
- Funding. Directors will need to find the necessary funds with which to buy the business assets. The Administrator has a responsibility to ensure assets are not undervalued. Consequently, it can be a significant financial undertaking for directors to access the funds needed, in the required time frame.
- There is no change in employees rights. The Transfer of Undertakings (Protection of Employment), or TUPE legislation, applies to pre-pack administration where roles are preserved by the new company. In these cases, contracts of employment are transferred to the new employer, protecting employee rights and safeguarding jobs. This can represent a huge liability for the new company from the outset, and a significant monthly outlay in terms of wages and other employment costs.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the issues covered above.
For further information, please contact one of our Partners who will be able to assist you.