Pre-pack administrations are the sale of an existing business to a new business, subject to various rules that need to be complied with when operating in the UK. These include having the business and assets valued first, marketed for sale in some form and then the right disclosure beforehand to key creditors and full disclosure after the event to all creditors.
The Rules of Pre-Pack Administrations In The UK
Pre-pack administrations are covered by the rules and laws in the Insolvency Act and also by Statement of Insolvency Practice issued by the professional body R3 as well as a guide from the Insolvency Service called Dear IP 42 (the 42nd letter sent by the Insolvency Service to Insolvency Practitioners on what they must do).
Here are some of the rules that must be covered for a successful pre-pack administration.
Before the sale of the business
- Get the assets identified and valued by an agent.
- Market the business and assets for sale. This may be on a very limited basis.
- Get the best offer and make sure the agents recommend you accept it.
- Properly identify the buyer, who may be the existing management and find out how they will fund the purchase.
- Talk to the top creditors by value before a sale is made to make sure they consent.
- Get the banks consent if there is a debenture otherwise the sale could be void as it is a material disposition of the company’s assets.
After the sale of the business
After the sale write to all the creditors (and the Insolvency Service) as soon as possible saying a sale has taken place and explain why including:
- What has been sold and for how much.
- How much marketing was done before the sale and who was interested in buying it.
- Who it has been sold to and any connections with the old business.
- What were the views of creditors consulted about the sale?
- What finance has the new business used to buy the old business and for example is the finance provided by the same bankers.
- Justify overall why was the sale made and would have happened if it had not been sold.
You can see that this can be quite burdensome. The reason these rules are in place is that most creditors don’t find out about the sale until after the event and they can get quite upset especially if it has been sold to the same owners and management. Creditors will usually need convincing that the pre-pack administration was a good idea.