PACK UP YOUR TROUBLES, WITH A PRE PACK ADMINISTRATION

Pre-pack administration is often seen as something ‘big companies do’. But it can be a real alternative for all struggling businesses looking for help in the post Covid-19 landscape.

Could it work for you? Let’s look at the what, whys and how of pre-pack administration.

What is a pre pack administration?

Keeping it simple: a pre-pack administration is an insolvency procedure where a company with a sound core business enters into an agreement to sell its assets to a buyer.

This buyer might be a competitor, third party or the existing directors operating under a new company name (normally called a ‘newco’).

The pros and cons of the pre-pack

Pre-pack administrations mostly happen when a business needs to take drastic action because there’s an imminent threat of a creditor starting a winding-up petition. But it’s not all doom.

The pros

• Your business operates normally without any interruption, helping to preserve the value of the business if it is sold.
• Once a business plan and purchase contract are drawn up, you are effectively protected by the court.
• Debts are written off.
• A pre-pack can be completed in as little as 24 hours.
• Creditors also benefit from a pre-pack, as the company can realise a higher price.
• There can still be some control for directors.

The cons

• The announcement of a pre-pack might appear in the press.
• It can leave unsecured creditors feeling they’ve been ‘left high and dry’
• A competitor could buy the company - they are often the most likely buyer.
• The directors’ position can become perilous as new owners may want their own people in charge.
• You must adhere to the TUPE rules. And all staff jobs need to be protected.
• If you’re going for a newco then your assets and business must be independently valued.
• If the company owes HMRC they may require a VAT security deposit to move forward.

A quick guide to the process

If you think a pre-pack is an option, here’s a simple step-by-step guide on what’s next.

Step 1: Look at the options.

Before opting for a pre-pack the directors must look at all options, including company voluntary arrangement (CVA), trade sale, refinancing, administration, and a creditors voluntary liquidation. If, or when, they decide on a pre-pack they must pass a resolution at a meeting stating they will consider the option in greater detail. This generally leads to Step 2.

Step 2: Appointing a licensed Insolvency Practitioner.

The SIP 16 rules stipulate that an Insolvency Practitioner (IP) makes the final decision on whether a pre-pack is the right course of action. This is to ensure that creditors are given enough information to understand the circumstances surrounding that decision.

Step 3: Create the business plan.

If the goal is for a newco to emerge from the pre-pack, you’ll need a business plan. Include profit and loss, cashflow, and balance sheet forecasts. Any administrator needs these as evidence that a viable company is being created. The newco will also need finance to fund the eventual acquisition. If you’re an SME expect to be asked for personal guarantees.

Step 4: Marketing the business.

It’s the administrator’s role to market the business and look for potential buyers. A good Insolvency Practitioner will create a database of interested parties, so the sale may not be too public or overt. They’ll also make sure the appropriate company value is achieved when it is sold. If no-one is interested, they can sell to the newco.

Step 5: Go into administration.

The company is then placed into administration and the assets sold. This can happen very quickly. A creditors’ meeting will need to be held too, to explain what’s happening. The administrators repay creditors (pro-rata) with funds received from the liquidated assets.

Conclusion

Many companies are feeling fragile right now. If the core of your business is strong, don’t leave it too late to get professional help. Done right, a pre-pack administration can be a seamless way of ensuring a business can continue to survive and grow.

CASE STUDIES

Many companies are feeling fragile right now. If the core of your business is strong, don’t leave it too late to get professional help. Done right, a pre-pack administration can be a seamless way of ensuring a business can continue to survive and grow.

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