Pre-Pack Administration

A Pre-Pack Administration is conducted to achieve the sale of the business and/or assets of an insolvent company. The sale of the business and/or assets is agreed with the Insolvency Practitioner (acting as Administrator) in advance of his formal appointment. The assets are sold under a Pre-Arranged Agreement and the business is transferred to the new company.

The new company is either:

• Controlled by the existing directors/management team or
• A new set of individuals although it is rare for this to be the case

Little open marketing will have been done prior to the sale, making it more likely that the purchasing company will be controlled by the current directors/management who will have needed to conduct little by way of due diligence of the purchase.

Secured creditors are likely to be aware of the Pre-Pack Administration but unsecured creditors are unlikely to have any advance notice.

It is important to note that it is a requirement of a Pre-Pack Administration that the financial return to the unsecured creditors must be greater than would be available in a liquidation.

A number of factors in favour of a Pre-Pack Administration include:

• The speed at which the process is concluded leads to considerable cost savings
• Jobs are preserved
• Goodwill is preserved
• The long-term viability of the business is maintained
• Unsecured creditors may be able to continue to trade with the new company

Whilst the Insolvency Practitioner does not need prior approval from the creditors, there is an obligation to provide the creditors with certain information such as:

• Why the Pre-Pack Administration procedure was chosen
• The underlying information on which this decision was based
• The connections between the company in Administration and the new purchasing company

Often the alternative to a Pre-Pack Administration is liquidation requiring the business to cease trading immediately and the loss of all the above-mentioned positive factors.

Pre-Pack Administrations have attracted a degree of controversy in recent times as there is the perception that the Insolvency Practitioner and the company are working together to the detriment of the unsecured creditors.

The criticisms relate to:

• Unsecured creditors are prejudiced, as they are not party to the Pre-Pack Administration and have no voting rights unlike in a normal Administration
• The limited marketing that is conducted could mean that the value achieved in any sale may not be reflective of the true value, thereby impacting negatively on the unsecured creditors
• The Insolvency Practitioner is not accountable in the same way in a Pre-Pack Administration compared to a normal Administration – no prior approval of the court or creditors is required
• The Pre-Pack Administration process is a ‘closed’ process which is restricted to a limited number of participants. This leads some to have less confidence in the whole process
• Suggestions that some directors misuse the Administration procedure to gain benefit for themselves at the expense of the unsecured creditors. The Insolvency Service has wide power to sanction company directors including the instigation of Director Disqualification Proceedings

A CVA has the same effect as a Pre-Pack Administration in that:

• The business continues to operate
• The current directors and management team remain in place
• Goodwill and employment are both preserved

The advantage of a CVA to unsecured creditors is that:

• The process is more open
• Each unsecured creditor has a vote and is kept informed of the Administration by the Insolvency Practitioner

For information on a CVA, read more here.

The expert lawyers at Kangs are available to assist you. We can arrange initial consultations in person, by video call or telephone.

Please contact one of our experts listed below or contact us at:

E: info@kangssolicitors.co.uk

T: 0333 370 4333