Is Pre Pack Administration Right Option For a Struggling Company?

Pre Pack Administration is a liquidation process in which a business arranges an arrangement to sell its properties to a buyer before naming managers to facilitate the sale. It’s a strong, legal way of selling the company to a third party or a trade buyer.

Alternatively, it is possible to sell the corporation to the current directors working under a new company (‘newco’). This is normally achieved if the organization encounters extreme difficulties and investor risks.

In order to acquire the old company’s properties (‘oldco’) at fair value, the ‘newco’ would need to be profitable and have financing in place.

Signs of real danger in your business

It can also be a solution to the danger of a petition that ends up. Pre-pack, however, is not allowed until a petition has been released. Here are the main signs that you should talk to experts about the financial state of your business:

  • Landlords’ threats.
  • HMRC demands PAYE and VAT fees.
  • Warnings issued by the bank or trade creditors.
  • Directors are worried about trading wrongfully and about the personal danger.
  • Businesses have onerous contracts, too many properties, too many workers, or have lost market share/customers.

When is a pre-pack administration suitable? 

For larger enterprises, pre-pack administration is more suitable as it is a complicated and very expensive process. It works well if there is a significant challenge to the company’s ability to continue to trade.

A vital supplier could withdraw assistance or there is a risk of a petition winding up. That said, there must be a good “company” there that someone is prepared to finance, even if the company is unable to continue in its present form.

Consult with insolvency or recovery experts who are trained to handle a pre-pack. 

For the board, and probably the bank, the advice given should be detailed and delivered in writing.

At this point, the new SIP 16 rules insist that all options, including voluntary company agreement (CVA), commercial sales, refinancing, administration, voluntary liquidation of creditors, and pre-pack administration, must be taken into account.

If the executive board wishes to follow pre-pack management, a resolution must be passed at the board meeting specifying that the alternative will be considered in more detail by the directors.

The resolution is likely to require the selection of advisors. Insolvency practitioners (IP), restructuring practitioners, or accountants maybe these.

Establish the business strategy for the new company to be established as part of the pre-pack administration

If the intention is to sell the company to a new company, then a plan must be drawn up.

This may include comprehensive estimates of profit and loss, cash flow projections, and estimates of the balance sheet. This will offer an example of requirements for working capital. This will be expected by the proposed administrator as proof that the new firm can be viable.

If the proposal is to be sold to an established trading firm, copies of management details and accounts from that buyer would be needed for the IP.

Again, this is to guarantee that the purchaser is viable.

Solve any enforcement problems 

The IP must market the company under the guidance of insolvency practitioners. This also includes sending promotional memos, putting an advertisement on their website, and/or a local or national newspaper to a database of potential buyers. 

They will then sell to the ‘newco’ or third party if they get no sign of interest.

If there are competition and many deals, however, your company may fall into a competitor’s hands. You may be able to buy back the company, but the result is not under your power.

At this point, the IP will have to obtain formal valuations by RICS trained surveyors of the insolvent company’s properties, intellectual property, and/or goodwill. Generally, with such valuations, any bid needs to be commensurate.

Similarly, you must be careful about your personal position if you / your colleagues are planning to buy the company. You have a fiduciary duty of care to the creditors of the company as directors of the dying corporation. It can put you at risk of conflict of interest by starting a ‘newco’. It is possible that both firms will need different legal counsel, so speak to insolvency lawyers with pre-pack experience.

As for enforcement and risk, the IP will take advice from their lawyers. It might be required to be compensated. Strictly speaking, for the pre-pack job, they do not bill time costs in advance but can ask for consultancy and fees.

Remember that Pre Pack Administration UK is typically the last resort that is taken into account when rehabilitation does not appear to be an option since it results in the original company’s official closure. It is also, however, a preferable alternative to losing all the properties (including customers, facilities, staff, etc.) that you have worked with the old company to build. If you need any help in this matter, feel free to contact Company Insolvency Services.