The term Pre-Pack Administration is the name given to an administration where the sale of the business has been agreed beforehand.
A Pre-Pack Administration is a very effective and quick way of saving a business. However, they are not usually popular with creditors because they find out the business has sold after the sale has taken place and it is then too late to do anything about it.
Advantages of a pre-pack
- It can save a business. It allows the business itself to carry on and have continuity with the staff and customers and also some of the creditors. It often stays in the same premises with the same or similar name.
- It is confidential before the sale takes place. This helps to reduce any rumours of financial troubles and hopefully stops the business losing any customers.
- It can be good for the directors who want to buy the business back. It does give the directors or management (if they are the buyers) a second chance and hopefully they have learnt from any mistakes or have kept the business going after an unpredictable major setback. An example would be a very large bad debt that is a one off.
- It is quick so may result in a higher return to creditors. It means the business does not have to be traded under the supervision of an Administrator so this can save professional fees.
- The brand image is better maintained. A quick fair price sale is better to preserve the reputation of a business and the value of goodwill.
- Historical creditors are left behind – a disadvantage of course to the creditor – but maybe better to get something back than nothing at all.
Disadvantages of a pre-pack
- There is still an investigation. If the directors are worried about this and their conduct, there is still a detailed investigation of what went wrong and a report filed with the Insolvency Service.
- All employee rights move across to the new company. This may be too much of a burden for the business to take on as all employee rights can move across automatically including redundancy.
- Some view pre-packs as unethical and they are high-risk work for Insolvency Practitioners. The Insolvency Practitioner who is Administrator knows he or she will face careful questioning form creditors and be closely scrutiny. A very detailed report has to be sent out to all creditors (called a SIP16 report) within seven days.
- The directors (if it is them buying) have to find the funds to buy the business. They also have to get new lines of credit and be able to fund the working capital and that may prove expensive.
- There can be a lot of upset creditors who feel left behind and also were not perhaps given the chance to buy the business.
A good use for a Pre-Pack is for an insolvent firm of solicitors as clients would lose confidence and leave quickly and take their business elsewhere. The Law Society that regulates all solicitor’s practices would does not allow an insolvent legal firm to carry on trading and would appoint alternative solicitors (under its intervention rules) to take over. This adds to the costs.
Another example is a marketing firm with a number of key staff with contacts with customers. The risk of a drawn-out sale is that the key staff leave and take the clients with them.
There are many other good and justifiable uses of a Pre-Pack Administration, if you would like to discuss Pre-Packs in more detail please contact us.