The pros and cons of pre-pack administration for insolvent companies
What is a pre-pack administration? Carl Faulds of Portland Business Support and Advice explains how it could be a potential option for insolvent companies.
What is a pre-pack administration?
A pre-pack administration is where the sale of all or part of a company’s business and assets is negotiated before an insolvency practitioner is appointed. Any relevant documentation is signed and implemented immediately or very shortly after the appointment is made.
Essentially, a pre-pack administration allows the quick sale of an insolvent business and assets can be bought by a third-party or a trade buyer. Alternatively, the directors of the insolvent business may purchase the assets and trade under a new name.
What are the advantages of pre-pack administration?
Pre-pack administration can be attractive for the business, its directors, and their creditors for various reasons. The main benefit is the speed at which assets can be sold, which often results in higher returns for creditors. But there are other benefits too:
- Business continuity
A break in trading can be extremely detrimental with loss of customers and sales impacting cash flow and putting jobs at risk. Pre-pack administration allows for a very quick transfer of business. This often means trading can continue uninterrupted because the business retains the same staff, can stay in the same premises and may even keep the same (or a similar) name.
- Job preservation for employees
Insolvency often requires cost-cutting and reduced trading operations, which in turn can result in job losses. Pre-pack administration can help avoid the need for redundancies, providing job security for employees.
- Reduced costs
The speed and efficiency of pre-pack administration makes it less costly than other administration procedures. Creditors can be paid quickly, and significant professional fees are also sometimes avoided.
- Brand image is maintained
There’s no denying that insolvency can have a negative impact on the reputation of a company. Pre-pack administration can mean a company avoids bad publicity, ensuring the positive image of the brand is maintained, helping to ensure the continued growth of the business.
- Directors maintain an element of control
Unlike other insolvency procedures where an administrator takes full control, a pre-pack administration affords the directors some control over their business. They can choose to sell the company to people already familiar with the industry, or even buy it back themselves. The option of the latter is very appealing to some directors, especially if the business simply went through an unexpected set-back rather than suffered because of poor management. Being able to learn from past mistakes and move forward increases the business’ chance of success.
What are the disadvantages of pre-pack administration?
While pre-pack administration is often a positive experience, there are some disadvantages to going down this route:
- There is still an investigation
After business assets have been sold, the old company may need to be liquidated. Part of this process includes the liquidator compiling a report for the Department of Business, Innovation & Skills. The conduct of the company directors leading up to the insolvency is investigated, and if deemed to be improper or fraudulent, they will face prosecution.
- Staff are still retained under TUPE rules
Employees may still be protected under the Transfer of Undertakings (Protection of Employment) regulations (TUPE). This means that redundancies and other cost cutting processes may not be possible. TUPE can be extremely difficult to navigate, so consulting a professional is always advised.
- It can be viewed as unethical
Pre-pack administrations can be viewed as unethical. This perception can make some areas of business (such as renegotiating supplier contracts) tricky. However, pre-pack administration is widely used in the UK and is governed by strict regulations.
- Cost
One of the jobs of the administrator is to ensure assets are not undervalued, since the goal of selling the business is to pay back creditors. If the directors decide to buy back their company, they will likely need to find a significant amount of money, and it may take some time to gather the funds.
About the author
Carl Faulds is Managing Director of Portland Business Support and Advice, an insolvency practitioner offering advice and support to ensure a positive future for your business. Find out more about pre-pack administrations here.
See also
Company insolvency statistics - Q3 2019
How insolvency affects companies in the construction sector
Find out more
The Insolvency (England and Wales) Rules 2016 (Legislation)
Business transfers, takeovers and TUPE (Gov.uk)
Image: Getty Images
Publication date: 12 December 2019