Pre Pack Administration – Benefits
A pre-pack administration (commonly known as a pre-pack) is a formal insolvency tool. It is used to protect the business and assets of an insolvent company. In general a sale of the business or certain assets is agreed either with the Company director(s), a connected party or a third party before entering Administration.
The benefits of a “pre-pack” is that there is a seamless transaction which ensures little disruption to the day to day running of the business. This benefits work in progress, assets staff and customers. A pre pack administration can be considered where:
- A company is insolvent either: on a cash flow basis (it is unable to meet its liabilities as and when they fall due) or a balance sheet basis (liabilities exceed assets). It is also insolvent if any legal action has been taken against, such as a statutory demand for an amount outstanding in excess of £750.
- The outcome of a pre-pack administration process is often considered to be a better alternative to other insolvency processes. The choice is determined by which process generates the greatest return to creditors.
The pre pack administration process has been open to criticism in the pas. Research shows that it is often better for employees than a business sale. Indeed, the process has saved thousands of jobs yearly.
Contact us or call us on 0207 831 1234 for help and advice on pre pack administration.
Need Help with Insolvency, Recovery or Turnaround?
If you or your business is facing insolvency, the sooner you contact us, the more we can help.
Pre Pack Administrations and TUPE
One matter to consider when dealing with staff is the Transfer of Undertakings (Protection of Employment) Act or TUPE.
Staff are protected from losing jobs during insolvency procedures. TUPE regulates how staff are moved to a new employer while retaining their accrued contractual rights. In a pre pack administration, employees’ contracts are usually transferred to the purchasing company along with existing contract rights.
What are the criticisms of a pre pack administration?
Since a sale is effectively entered into pre-administration, critics have asked how a Licensed Insolvency Practitioner knows that they are obtaining the best possible price for the business without having “tested the market” by putting the business up for sale on the open market.
Questions have also been raised regarding the transparency of the transaction. Secured creditors are notified of an impending sale prior to the sale being agreed whereas unsecured creditors generally are not. In addition, if a sale has been made to a connected party this may be seen by creditors as a means to not paying its debts.
As With All Insolvency Procedures, Licensed Insolvency Practitioners Must Follow Strict Procedures
To help eliminate these potential abuses of process, Insolvency Practitioners have strict codes of practice to adhere to. These include:
- Disclosure to creditors of any attempts to market the company, examining the value with external benchmarks and where appropriate liaising with major creditors
- Disclosure to creditors of why the decision to proceed with a pre-pack administration was undertaken together with disclosure on connected party information
- A report is issued to creditors as soon as possible allowing them to vote to agree to the action taken