A pre-pack enables a sale of the company’s business and its assets as a going concern, without affecting the goodwill of a business or its continuity by the appointment of an Administrator.
It also maximises the recovery of goodwill, debtors and work in progress, which often become more difficult to realise on an administrator’s appointment.
An administrator is often unable to trade a business in administration, due to the lack of working capital to pay ongoing trading liabilities that form an expense of the estate. Furthermore, creditors can levy duress over the administrator and withhold key supplies or services without demanding ransom payments, which affects the viability of trade, while a buyer for the business and its assets is sought.
Typically, when a company is in administration, revenue streams reduce, and losses can be incurred, reducing funds ultimately available for creditors.
The pre-pack process needs to be transparent, and the insolvency practitioner is expected to market the business to third parties and trade buyers to ensure the best price is obtained. Directors are also able to make an offer to reacquire the business and its assets.
However recent changes to legislation, that came into effect from the 30th of April 2021, have been implemented to further protect the interests of creditors by restricting certain sales by Administrators to connected parties within eight weeks of the commencement of the Administration. The Pre – Pack sale can still proceed as long as certain criteria are met. There is now a requirement that either a qualifying report on the proposed transaction is undertaken by an independent evaluator or alternatively consent to the transaction is received by the creditors. The Administrator will be required to seek approval by agreement to the statement of proposals issued within eight weeks of the Administrators appointment,
The pre-pack process
The key steps involved in the process are:
- A company is loss-making, has cash-flow issues and is under duress/pressure from its creditors, legal or otherwise.
- An insolvency practitioner is contacted to review the company’s current financial position and the options available, including its short-term working capital position.
- The company’s assets are valued, and a disposal strategy is identified.
- An Independent Evaluation Report is obtained, or a strategy is agreed whereby consent of creditors will be requested.
- A sale-of-business memorandum and a sales pack of pertinent information are prepared, to generate expressions of interest and offers to acquire the business and its assets.
- A short period of marketing is undertaken on a no-names basis with a deadline set for receipt of best and final offers.
- A preferred bidder is chosen, and a legal contract is issued to negotiate the terms of a going-concern sale by a subsequently appointed administrator.
- The administrator is appointed by the directors/shareholders and conducts a sale of the business and its assets as a going concern, shortly after appointment.
- The administrator then sends his proposals for the purpose of the administration and explains the outcome achieved against a liquidation scenario.
The advantage of a pre-pack is that in the hiatus period, the business is still controlled by the directors, with the assistance of the nominated administrator, while a sale is explored.
This results in minimal impact to the company’s goodwill, as the process is confidential and, as such, doesn’t become apparent to creditors, customers or employees.
This gives the nominated administrator the best chance of selling the business while maximising value and retaining goodwill, for the benefit of all creditors generally.
Dean Nelson, Nicholas Lee, Andrew Stevens and Michael Roome are all licensed in the United Kingdom to act as insolvency practitioners by the Institute of Chartered Accountants in England and Wales. They are bound by the insolvency code of ethics, which can be found here.
When acting as receivers, administrative receivers or administrators, they act as agents only, without personal liability, and when acting as administrators, the affairs, business and property of the company are being managed by them.