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When would you do a pre-pack administration?

If your company is having serious cashflow problems, there are a number of different options for dealing with the situation, including:

As pre-pack admins are not as well-known as the other options, we thought it’d be useful to explain what they are and when they are used.

What is a pre-pack admin?

R3 (the trade body for Insolvency Professionals) describes a pre-pack as:

“…a deal for the sale of an insolvent company’s business and assets which is agreed in principle before the company goes into a formal insolvency process, usually administration.”

They are often referred to as a ‘pre-pack admin’. The deal is usually worked out before an Insolvency Practitioner (IP) is appointed and completed quickly, once the IP is appointed.

When would you use a pre-pack admin?

The typical situations for using the pre-pack admin option are:

    • the company has cashflow problems and can’t pay its creditors

 

    • there is a potential buyer for the business (this could be directors/employees of the company or a 3rd party)

 

    • there is a realistic likelihood of the purchasing company being able to make a success of the business

 

  • the value of the business would be eroded if it were to be first placed into some form of insolvency procedure and then marketed for sale
  • liquidation is not an option because:
      • a winding-up petition has been served on the companyA winding-up petition voids any property dispositions after the petition is presented, unless approved or ratified by the court.  This includes the actions of a liquidator appointed in a Creditors’ Voluntary Liquidation (CVL). This means that no pre-liquidation sale can validly take place once a petition has been presented.

     

    • there is no quorumFor a company to be placed into voluntary liquidation there must be a quorum (i.e. sufficient number of shareholders) in agreement to the action. If this is not the case, then the company cannot go into voluntary liquidation.
How does a pre-pack admin work?

The typical process of a pre-pack admin is:

• A company is in serious financial difficulty
• The directors seek advice from their Accountant and an Insolvency Practitioner
• After considering all the options, the IP recommends a pre-pack admin
• The IP will instruct independent professional agents to make an assessment of the value of the company
• Independent professional agents with the assistance of the IP and directors (discreetly) market the business to find potential buyers of the company
• Offers are received from potential buyers and the independent professional agents advise which offer they would recommend accepting
• The sale price is agreed between the IP and buyer
• Contracts are prepared, setting out the terms of the deal
• The IP is appointed as Administrator
• Upon appointment the IP immediately sells the company on the agreed terms
• The business (and its workforce) are transferred to the new company
• Proceeds from the sale pay back the creditors – in the normal order of priority.

What are the benefits of a pre-pack admin?

The main benefits of putting a struggling company into pre-pack are that it typically:

• saves more jobs – with some or all employees being transferred to the new company
• better return for the secured creditors
• preserves the value of the company due to the speed of the process – the longer the sales process is, the more likely the company’s value will be depleted as people (clients, suppliers and staff) become aware that the company is having problems.

Criticisms of a pre-pack admin

Pre-pack admins do get some criticisms, but they can be the best option in the right situations. The main criticisms are:

• The sale of the business is not put out to the open market.

Statement of Insolvency Practice 16 (SIP 16), which governs how an IP conducts a pre-pack, requires an IP to follow 7 principles of marketing, ensuring the widest possible coverage allowed by the circumstances of the case.  Any failure to comply with the SIP requirements has to be explained to creditors. Because the IP needs to move quickly and discreetly to ensure that the value of the company is preserved for the benefit of creditors and staff, marketing may be restricted.  Whilst the open market sometimes doesn’t get involved in the sales process, the pre-pack admin option does get the best outcome possible for creditors and employees in the right scenarios

• A lack of transparency for stakeholders.

Due to the necessary quick speed of the pre-pack, some creditors are only normally made aware of the pre-pack after it has been completed.

But…to improve this transparency issue, SIP 16 was introduced. In SIP 16, the Administrator is required to disclose to creditors the attempts that were made to market the company. If creditors are not happy with the statement that the IP makes under SIP 16, they can complain to the relevant regulators.

• It is often connected parties who are the buyer.

It is often the case that the only parties that are interested in buying the company are its directors or staff. Whilst some people may not like this, it is preferable to putting the company into liquidation – which will see all the staff losing their jobs and trade and expense creditors often getting no returns. Any connected party interested in purchasing the assets of the company is recommended to speak to the Pre-Pack Pool before the transaction is completed.

What is the Pre-Pack Pool?

The Pre-Pack Pool is an independent body of experienced business people which was set up in November 2015 to offer advice where a pre-packaged sale is proposed.

The aim of the Pool is to increase the transparency of connected party pre-packs and to provide assurance for creditors that independent business experts have reviewed a proposed connected party pre-pack transaction before it is completed.

It is the connected party purchaser (not the IP or the creditors) who is responsible for making a referral to the Pool. It is a mandatory part of the process that the Insolvency Practitioner must inform the purchaser of the option to use the Pool.

The role of the Pool is to review the proposed sale and comment on whether, based on the facts presented to them, it appears to be reasonable to proceed. Even if the Pool says that there is not enough evidence to say whether a sale is reasonable, it can still go ahead – albeit this has to be disclosed to creditors.

A Viability Statement

SIP 16 also requires an IP to encourage the purchasers in a connected party pre-pack to provide a viability statement.  There is no set format, but it should be a statement explaining why the new owners consider that the business will survive for at least 12 months after the purchase is completed.  It should ideally explain what the new management intends to do differently, to avoid the problems experienced by the old business. While a viability statement is not mandatory, the IP will have to comment if it has been requested and is not provided.

What about any book debts?

The book debts are sometimes transferred from the old company (‘oldco’) as they are usually going to provide the working capital of the new company (‘newco’) going forward.

Frequently, the existing financiers are replaced by those that have more of an appetite for re-start propositions; and they will purchase the debt from the oldco’s previous financiers.

This part of the process can be tricky, but we have the expertise (and the business contacts) to sort it out and introduce you to financiers who want to be working with you.

How much does a pre-pack admin cost?

Fees and costs are agreed on a case by case basis. However, one of the main advantages of a pre-pack admin is that there are no upfront fees or costs. This is a huge benefit, especially given the company’s cashflow problems.

All the fees and costs will be paid from realisations, with most of them requiring creditors’ approval. Because of this, we are very particular which solutions we would recommend to an insolvent company. We can only recommend a pre-pack admin if we think the purpose of the Administration can be successfully achieved i.e. that this would be the best outcome for creditors.

Is Pre-Pack Administration Right For Me?

If you are the director or a shareholder of a company which is having financial / cashflow problems, we can help you.

The right option for you could be:

  • Creditors’ Voluntary Liquidation (CVL)
  • Creditors’ Voluntary Arrangement (CVA)
  • Administration
  • Pre-Pack Admin.

We will work with you to establish which is the best option for you. Then, if you appoint us, you can be assured that you will get a friendly and professional service – at an affordable price. (And we are regulated by the ICAEW.)

Contact us today for your free and confidential advice.

Thank you for all your help with the liquidation matters. You were a joy to deal with.

They kept me properly informed throughout the whole process with full explanations to my many questions….their patience and empathy meant so much to me. My heartfelt thanks to them all!

Thanks to the help I received from Clarke Bell, I am able to pay off my debts in a reasonable and realistic manner.

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