The Rules, Requirements, and the Advantages of Pre-Pack Administration
Do you have an insolvent business that is potentially still viable? If the business model is effective but your business must shed debt as well as other liabilities so that it becomes profitable, the ideal option for you could be a pre-pack administration sale.
Pre-pack administration means that your existing company enters administration because it is insolvent. Your business’ assets are sold to what is typically a new company that is operated by you as well as other company directors from your currently insolvent business.
What this does is that it permits your business to retain some or even most of your current staff, in addition to your current customers/ clients.
There are numerous benefits of pre-pack administration, not least, your current employees do not have to be made redundant.
Pre-pack administration is surrounded by intricate rules and regulations and as such it’s a process that is legally complex. That said, you should always ask for advice from an insolvency practitioner and they will inform you if pre-pack administration is the right option for you.
Pre-Pack Administration – What is it?
Pre-pack administration allows your business to quickly restructure. It’s an insolvency procedure that permits your business to resume trading via a new company – referred to as a ‘new co.’ – once it has become insolvent.
After your company has become insolvent you, as a company director are legally obliged to halt trading with immediate effect.
With pre-pack administration, your business is entered into administration and its assets are then sold to another company. This other company can be under your ownership as well as under the ownership of the other directors in the existing company. It can, likewise, be owned by shareholders from your insolvent company.
Pre-Pack Administration – What are the Requirements?
Not all businesses are suited to pre-pack administration. The strict requirements in place are designed in such a way to reduce any possibility of abuse. This abuse could occur if the assets of a company are sold to a new company at well below their current market value.
It’s up to your company’s insolvency practitioner to ensure that it – the company – is in full compliance with legal requirements. Among the legal requirements are:
- The company must be insolvent and also nonviable. There must be no chance of recovery, either by way of a company voluntary arrangement (CVA) or by emergency financing.
- The insolvent company’s assets must be purchased by the new company at a price that is fair to the creditors of the insolvent company.
The insolvency practitioner and the insolvent company’s directors must demonstrate that through administration the creditor value is maximised. They must also show that administration is in the insolvent company’s creditors’ best interests.
When Pre-Pack Administration is Used, What Can be Preserved?
When a company is closed and liquidated, typically it will mean that the company loses all of its assets.
What pre-pack administration does is that it allows assets, both tangible and intangible, to remain preserved and sold to the newly formed company.
Staff can likewise be preserved and this can prove to be among the most significant benefits that pre-pack administration provides for.
Is Business Delayed or Interrupted by Pre-Pack Administration?
While pre-pack administration can prove to be a legally complex process, any significant interruption of operations carried out by either the insolvent or the new company are generally limited in nature. In fact, frequently, pre-pack administration is relatively seamless.
Even assets, for example, contracts still in work, can be bought and then transferred over to the new company.
Does Pre-Pack Administration Make Sense for Your Business?
If your company possesses valuable assets and you believe those assets should be preserved but your company is burdened through debt and various other liabilities, you may be given the opportunity through pre-pack administration to preserve certain aspects of your business and to settle with creditors.
As mentioned, there are regulations in place that are complex and detailed that prevent any event of wrongful trading when pre-pack administration is used. The pre-pack administration process makes it impossible to simply dispose of debt and then open a new company.
An expert insolvency practitioner can assess the situation of your company. They will then make a determination if pre-pack administration is a suitable route to take.
Liquidation or a CVA might be more appropriate for the creditors of your company.