7

Pre-Pack Administration

Sometimes, when a company runs into financial difficulty, the best strategy may involve the sale of the business or assets. There are certain businesses (typically owner-managed businesses and where the assets are often intangible) where a protracted sale process would result in a worse outcome for creditors. For example, the value of a recruiting business would lie in its contracts and reputation of the owner and staff. Prior public announcement of a sale often causes uncertainty, resulting in contracts being lost and staff leaving – effectively the value of the goodwill quickly evaporates.

A pre-pack sale involves agreeing a sale of a business before the company enters into Administration. This allows the sale to be completed immediately after appointment and allows greater realisations for creditors.

Prior to appointment the insolvency practitioner would package the business for sale; this would be marketed and a sale agreed before any negative impact of administration reduced the company value.

There are a number of benefits in using this procedure, as pre-packs:

  • Allow the smooth, seamless transfer of the business which can preserve the value of goodwill, work in progress and the order book which could be otherwise lost if the business ceased trading or if the existence of financial difficulties were known.
  • Lower the degree of uncertainty and adverse publicity which will minimise the risk of deterioration in the company’s customer base
  • Benefit creditors more than trading the company in administration (whilst a buyer is sought) as costs are generally lower in respect of:
    • Landlord claims
    • Employee claims
    • Warranties
    • Insolvency fees

 

Before recommending a pre-pack sale the insolvency practitioner must be convinced that:

  • It is in the best interests of the company creditors and no other insolvency procedure would be more suitable
  • The assets can be sold at fair market value
  • One of the statutory purposes laid down in para 3, Schedule B1 of the IA 1986 can be achieved, namely:
    • Rescuing the company as a going concern
    • Achieving a better result for the company’s creditors as a whole than would be likely if the company were to be wound up (without first being in administration)
    • Realising property in order to make a distribution to one or more secured or preferential creditors.

Stages

There are a number of stages when agreeing a pre pack sale of the business:

Business Review

  • Review of the financial position of the company and potential course of insolvency action.
  • Review of the assets of the company including any work in progress and order book
  • Review of liabilities of the company including any pressuring creditors.
  • Looking at potential sources of funding and whether it is possible to trade the company in order to obtain a better return for creditors.
  • Obtain an independent, professional valuation of the business as a whole as well as on a break-up basis.

Sales Agreement

Once that it has decided that a pre pack is the best course of action the insolvency practitioner will:

  • Instruct an agent to value the assets & business
  • Instruct a solicitor to draft a sales agreement.
  • Potential completion dates and payments terms will be agreed

Company enters Administration

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