The Pre-Pack Administration process has become an increasingly popular option in recent years amongst directors struggling to overcome company financial difficulties.
Of the 20,000 businesses that go through an insolvency procedure each year, pre-packs account for 600 to 700.
In short, the process involves putting an insolvent company into administration and selling the company and assets. The sale has to be arranged before the company is put into administration to ensure there’s a suitable buyer.
The process requires a licensed insolvency practitioner who’ll conduct a review of the insolvent company’s activities to determine whether the company can be sold. The practitioner’s role also requires them to assess whether jobs and B2B relationships can be preserved. Once a thorough assessment has been carried out and a buyer has been confirmed, the insolvency practitioner will negotiate and agree the terms of the sale.
In some cases, the purchaser may be member(s) of the existing management team.
Why are Pre-Packs so popular?
One of the main benefits of Pre-Pack Administration is that it offers directors the prospect of saving the company’s business, even if it can’t save the whole company itself.
By selling the business in this way, ongoing trade, relationships with customers, and jobs can all be preserved. Often, the company’s reputation and brand can be maintained too.
How transparent are Pre-Pack Administrations?
In the past, many were concerned about the lack of transparency and regulation regarding Pre-Pack Administration sales.
This was largely because the pool of creditors would not be consulted due to the need for a quick sale. Some creditors raised concerns that the Pre-Pack Administration process makes it easier for ‘phoenix companies’ to emerge.
How has SIP 16 helped the process?
To address creditors’ concerns and make the process more transparent, the Insolvency Service issued professional guidelines for Insolvency Practitioners. Named SIP 16, the guidelines set out principles and steps that practitioners should consider and adhere to when administering a Pre-Pack Administration.
SIP 16 isn’t legally binding, but failure to comply can result in regulatory or disciplinary action against the IP.
The guidelines ask that administrators keep records of the reasons behind the decision to opt for a Pre-Pack Administration and a detailed assessment of other options that were considered. All this information must be disclosed to creditors within 7 days of the company being sold.
SIP 16 has also introduced a panel of independent experts who can be contacted by connected parties in a bid to discuss whether the Pre-Pack was reasonable.
SIP 16 also now requires practitioners to demonstrate that the business was effectively marketed.