Pre-pack Administration is a comparatively new insolvency process which is gaining in popularity because it allows a feasible but insolvent business to be sold in order that it can continue trading under a new name without the headache of its debts.
Once the process of pre-pack administration has been started the limited company is secure from action by creditors. The old company can then be sold to either a third party or another company, which is where the directors form a new company in order to continue trading.
Pre-pack administration can be defined as a pre-packaged sale of company assets and trade. Therefore a new company will need to be formed so that the old company can be simply transferred to the new company with minimum disruption, following the sale the old company, which will be put into administration. The process therefore involves: setting up a new limited company; appointing an insolvency practitioner to oversee the process; protecting the assets; raising the funds to purchase the business and assets; holding discussions with the Bank; and finally holding discussions with HMRC.
The main advantage to a pre-pack administration is the protection of the business itself and, usually, jobs. It doesn’t have the disruption and costs of a formal insolvency but can provide a better result for the company’s stakeholders.
In current law, an administrator must perform his task with the objective of rescuing the whole company, unless he believes that is not reasonably practicable or that a sale of the business and assets will provide a better result for the company’s creditors as a whole. An administrator performs a similar duty to the company director. Therefore in commencing a pre-pack deal so shortly after his appointment, the practitioner will want to be satisfied that the deal is in the interests of the company’s creditors as a whole.
The main advantage of a pre-pack administration is naturally minimum disruption to the day to day running of the business. Theoretically the case can begin to be looked at by the administrator for several weeks beforehand, without the pressure of running the business in administration. It is common practice for most businesses these days to lease or finance most of their assets; intellectual property and goodwill is effectively vested in a few senior staff and many businesses are service companies without substantial underlying assets, in which case much of the value may alter the day an administrator or receiver is nominated. Pre-pack administration can enable jobs and employment rights to be maintained, new funding to be secured and where necessary unsuccessful divisions closed down. Economic value is often compounded by pre-pack administration rather than the company and its employees suffering the damaging consequences of a traditional insolvency process.
So in conclusion, pre-pack adminstration is an almost painless free way for a company to solve its debt problems and breathe some new life back into its business, whilst securing jobs and a future for all involved. It is a way of avoiding a potentially damaging traditional insolvency process, which will be detrimental for all involved.