What is a pre-pack administration?
There are many reasons why a director may consider closing a limited company. Some directors see genuine hope of recovery from financial difficulties and therefore opt for a pre-pack administration. What does a pre-pack administration mean?
Company pre-pack administration meaning
A pre-pack administration is an insolvency procedure that involves directors selling their business assets to a new company, often headed up by the same directors as the insolvent company. The old, insolvent company may be referred to as oldco, and the new company would be newco.
A pre-pack administration is a legal method of closing a business. This method is often used by businesses suffering financial hardship. The pre-pack administration process can be quite complex, but our experts at 1st Business Rescue are on hand to offer valuable director support.
The first step to a pre-pack administration is to contact a licensed insolvency practitioner who deals with pre-pack administrations. At this point, the pre-pack administration should be considered in great detail. The appointed insolvency practitioner will be checking to see if your business model does have the potential to succeed without the burden of the legacy debt.
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In a pre-pack administration, the business must be advertised, generally for a period of 5- 10 days. This means that others may place bids on your company, there is a certain element of risk involved here if your intention is to purchase the company out of admin. These potential buyers can include your competitors.
You should seek advice on this step of the pre-pack administration process. There are lots of details that you need to think about before going any further.
The first step would be to seek a valuation of the company, this would need to be carried out by an independent valuer with the relevant experience and accreditations.
Who can use a pre-pack administration?
A pre-pack administration is mainly used by businesses that are suffering financially. It may also be considered by businesses who have received a severe threat of a winding-up petition. A winding-up petition is an order sent by creditors to initiate a compulsory liquidation. We always recommend assessing your options early and trying to avoid compulsory liquidation. Entering this form of liquidation leaves you at risk of more director scrutiny.
When applying for a pre-pack administration, there are some criteria that must be met.
Is the business viable?
You’ll need to provide evidence of a strong business model that can succeed past its current financial problems. If there’s no hope of recovery, you may need to look into other liquidation procedures. Feel free to contact us if you’re unsure of the next steps for your business. We’re always happy to provide confidential and honest advice.
Are there any other options for business debts?
A pre-pack sale should be the last option you have. Those who enter a pre-pack procedure must have no way of paying off the company’s debts, so the business would end up being closed regardless.
If there is a hope of financial recovery, you may find an alternative method more effective. These may include a company voluntary arrangement (CVA)
Advantages and disadvantages of a pre-pack administration
There are many pre-pack administration pros and cons. You must seek advice from a licensed insolvency practitioner to ensure that the process is right for your business.
Business continuity
The business is free to continue trading without having a period of closure while things settle. This helps the business to retain value.
Debts are written off
All unsecured company debts will be written off, meaning that the new business can trade as normal without worrying about creditor pressure.
The process is quick
The pre-pack administration process is typically fast. It can also be made easier by accessing the right support and ensuring that all criteria are met.
Creditors are better off
This method of administration works in favour of the company’s creditors. They will receive more money they are owed through this method than they would if a liquidation was used.
Save jobs
Employees are transferred to the new business, and their contracts must be adhered to. This saves jobs and can help to build a stronger relationship between existing directors and their staff.
Disadvantages of a pre-pack administration
As with every insolvency process, there are disadvantages that must be considered.
Negative publicity and poor business reputation
Creditors may not want to continue working with your business after you have completed a pre-pack. This is because they may already have a negative opinion based on past events with the old company.
Big creditors, such as HMRC, may request that you pay a security deposit before registering the new company. This acts as a security for them and reminds you of the importance of keeping up with your payments.
Funding the new business
No liquidation or administration procedure is free. As the director of the company, it is your responsibility to raise the money to complete these actions. This can create extra worries for a director who is already struggling financially, hence the consideration of a pre-pack sale.
Competitor ownership
When using a pre-pack administration, you may come up against your competitors when bidding for your company. For larger companies, this may be more likely to occur because your competitors already know your business.
You should ensure that you have completed in-depth research before applying to enter a pre-pack. There are lots of elements to consider with a pre-pack sale.
How much does a pre-pack administration cost?
The cost of a pre-pack sale varies based on the size of your company and the assets due to be realised.
Make sure that you seek independent advice before entering a pre-pack administration. Get all details in writing and ensure that the liquidator has assessed everything, including whether you have an overdrawn director’s loan account or have signed any personal guarantees. It’s better to have all of this information available at the beginning rather than finding out later down the line.
What happens to employees in a pre-pack administration sale?
As a director of a limited company deliberating whether to enter a pre-pack administration, you might be wondering what happens to your employees.
One of the biggest benefits of pre-packs is that there is the opportunity for staff to remain employed at the new company. The new company must honour employee contracts as part of the company sale. These pre-pack administration employee rights help to limit financial losses and lower stress for employees.
There is a lot to think about when it comes to a pre-pack. Please feel free to contact us for any guidance and support. The team at 1st Business Rescue are happy to provide honest and confidential advice based on your personal circumstances and the liquidation process.
Pre-Pack Administration FAQs
Can any business qualify for pre-pack administration?
A pre-pack administration is usually used when a business is struggling financially. It can be used before a winding-up petition is issued, which is what starts a compulsory liquidation. There are criteria that you must meet before beginning a pre-pack administration.
What is the role of a licensed insolvency practitioner in a pre-pack administration?
The insolvency practitioner will take care of everything regarding your pre-pack administration. In the beginning, they will be checking to ensure that your business model has the potential to succeed.
How long does the pre-pack administration process typically take?
Every business is different and has varying requirements. Pre-pack administration is usually fast, taking 4 – 10 weeks to complete. Ensuring that documentation is ready on time helps speed up the process.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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