Marco Piacquadio, Director of FTS Recovery and FA Simms, explains who could benefit from a pre-pack administration, and why it could be an alternative option for your client’s struggling business.
A pre-pack administration, which is commonly referred to as a "pre-pack," is an insolvency procedure that allows a troubled business to be sold as a going concern, with its assets and business operations transferred to a new company. This process is designed to preserve the value of the business, maximise realisations and returns for creditors, and minimise disruption to operations.
One of the key elements of a pre-pack is that it’s common for the new company to be owned by the current director(s), shareholder(s) or investor(s). It allows for a seamless transition of the business to this new company, often without the need for significant operational changes or business interruption.
An overview
In a pre-pack, the licensed insolvency practitioner is appointed to advise the company, market the business and assets, and agree a sale prior to the company prior to entering administration. They work with the company's directors to identify potential buyers, negotiate the sale of the business and assets, and agree the sale transaction and legal agreements.
Once a buyer is secured, the company is placed into administration and the pre-negotiated sale is completed immediately or shortly after.
The primary purpose of a pre-pack administration is to facilitate a swift and efficient sale of the company's business and assets. By minimising disruption to operations, a pre-pack aims to preserve the value of the business, retain employees, and maintain customer and supplier relationships.
The advantages of a pre-pack
Using a pre-pack, struggling businesses could strategically restructure, shed debt and maximise recoveries for creditors – outcomes that may not be possible through a normal administration process or a liquidation.
It preserves value and goodwill: A quicker sale of the business and assets to a pre-determined buyer, a pre-pack allows the company to continue trading with minimal disruption. This helps preserve the value of the business, its customer base, supplier relationships and brand reputation.
It maintains employment: In a pre-pack, the employees’ rights and obligations transfer to the purchaser under TUPE Regulations. And because skilled employees and their institutional knowledge remain with the business, providing continuity this reduces costs associated with recruiting and training new staff.
It’s a quick process: The pre-negotiated sale allows for a much swifter resolution compared to a normal administration, where the administrator must first take trade of the business under his control, market the business and then negotiate a sale. It also saves significantly on professional fees and the need to fund ongoing trading in administration.
It gives the business a clean break: A pre-pack represents an opportunity to transfer the viable components of a business to a new company that’s free from historic debts and other liabilities that challenged the previous company. This "clean slate" can mean a fresh start and help attract new investment in the restructured business.
There are also a few disadvantages of using a pre-pack
There has been recent coverage of pre-packs in the media, which indicates that their public disclosure is a potential drawback. This publicity could potentially impact on your client's business reputation as well as trust with customers, suppliers, and employees. But with strategic planning, it’s possible to effectively manage and shape the narrative surrounding this process.
A common scenario involves the business and its assets being acquired by those currently involved in the ownership and running of the company. However, the administrator must act in the interest of all stakeholders. This could lead to competitors purchasing the business if they have a superior offer.
Nevertheless, the existing directors, owners or shareholders often emerge as the most favourable purchasers, as they’re already equipped with an in-depth understanding of the business. However, for a related party transaction it’s a requirement to have the deal approved by an independent evaluator. This adds additional time and cost to this process.
The criteria for a pre-pack
A pre-pack administration can be an appropriate solution for businesses facing insolvency, in certain circumstances. It may be suitable when:
1. The business is viable. If the underlying business model is fundamentally sound but the company is struggling due to factors like excessive debt, changes in their industry or temporary economic conditions.
2. Your client has stakeholder support. Pre-packs are more likely to succeed when there is support from key stakeholders, such as secured creditors and major suppliers. Their cooperation and support can help ensure a smooth transition and continued operations.
3. There are potential buyers. The existence of an interested buyer willing to acquire the business as a going concern is crucial. This could be for the existing company director(s), shareholder(s) or investor(s), operating under a ’newco’, or it might be a competitor.
An outline of the pre-pack process
When considering a pre-pack, it's important to carefully evaluate the specific circumstances of the business, its future viability and the potential impact on various stakeholders. The insolvency practitioner involved plays a critical role in assessing the suitability of a pre-pack and guiding the process.
1. Planning and preparation: Your chosen insolvency practitioner works with you and the director(s) of the company work to evaluate the viability of a pre-pack. This involves assessing the company's financial position, identifying potential buyers and gathering necessary information to enable due diligence to be undertaken.
2. Marketing the business: The insolvency practitioner discreetly markets the business and assets to potential buyers through a confidential sales process. This helps to secure a buyer before entering administration.
3. Administration and sale: The company is placed into administration and the insolvency practitioner is appointed as Administrator. Immediately after appointment, the pre-negotiated sale of the company's business and assets is completed.
4. Transfer of employment: As part of the sale, the employees' contracts are transferred to the new company under TUPE regulations, ensuring continuity of employment and providing stability for them and for the business.
5. Distribution of proceeds: The sale proceeds are distributed to creditors according to the priorities set out in the Insolvency Act. Broadly, secured creditors are paid first, followed by preferential creditors and then unsecured creditors if there are sufficient funds.
8. Reporting and closure: The administrator files reports detailing the pre-pack process, including justification for the sale and an explanation of the marketing efforts undertaken. Once the administration is completed, the company can be dissolved or move into a different insolvency process if appropriate.
Throughout the process, your chosen insolvency practitioner must act transparently and in the best interests of the all stakeholders, while also ensuring compliance with relevant regulations and ethical standards.
A pre-pack administration is a powerful tool.
By carefully weighing the pros and cons, seeking expert guidance and taking a proactive approach, businesses can often navigate the pre-pack administration process smoothly. This increases their chances of a successful restructuring and fresh start.
Every situation is different. We’ll work with you and your client to assess how viable a pre-pack administration is for their business and carefully evaluate the alternatives. Talk to us about your client’s situation by calling 01455 555 444 or emailing enquiries@fasimms.com
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