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What is a Pre Pack Administration?
A Pre Pack Administration is a procedure available to some insolvent companies if it’s deemed to be in the best interest of creditors. It involves the pre-arranged sale of all or some of the assets from the insolvent company into a new company, often referred to as a ‘newco’. This newco can have the same directors as the original insolvent company (often referred to as an ‘oldco’), or it can be a completely separate party which has an interest in purchasing the assets. The assets however, must be bought at market value as determined by an independent professional valuer, in order to achieve maximum realisations for creditors.
Once the sale of the company’s assets has been arranged, the company is then placed into Administration and the sale of the assets takes place. The assets can be sold very quickly once the company enters Administration, so often the disruption to trade is minimal. Any assets owned by the original company that were not sold in the pre pack arrangement would be realised through other means and the original company would then be closed down. The cash realised through the sale of company assets would then be used to make repayments to creditors on a pro rata basis after deduction of the costs and expenses of the Administrator.
The benefits of Pre Pack Administration
A Pre Pack Administration is an effective recovery tool and when circumstances allow its use, it has the following advantages:
- The use of a Pre Pack Administration will generally result in a higher return for creditors as opposed to a Liquidation, as all assets are bought at insitu market value and a consideration will often be paid for brand, goodwill and other intangible assets.
- A Pre Pack Administration can preserve the jobs and livelihoods of the company’s staff as well as ensure that the business survives, which means it can continue to do business with its current suppliers.
- Using a Pre Pack Administration may allow the newco to resume trading using the oldco’s premises and may even permit the use of its trading name (with approval from the Court) preserving the goodwill and trust associated with the brand.
- Using a Pre Pack Administration can ensure that assets are sold to the new company seamlessly, minimising disruption to the business and deterioration of the businesses brand and reputation.
Many creditors believe that a Pre Pack Administration would serve only to benefit the newco by allowing it to carry on trading, apparently unencumbered with its previous debt. However, this is not the case and the use of a Pre Pack Administration is often an effective way to give a better return to creditors and save viable aspects of a business simultaneously.
The common concerns of Pre Pack Administration
Whilst commercially viable aspects of a business can be saved, Pre Pack Administrations are not entirely without their pitfalls. The following are common concerns of directors who are considering a Pre Pack Administration:
- Directors may be concerned that old suppliers will not wish to trade with newco. Sometimes this may be the case but often suppliers (even if they have faced a bad debt as a consequence of the Pre Pack Administration) are keen to retain the business moving forward and will supply on a pro forma basis (ie not allowing credit). Over a period of time this gives suppliers the opportunity to earn profits which may go some way to mitigate losses suffered with oldco.
- Often, there can be concerns amongst directors that continuing to trade using the same business model and management structure as the oldco could lead to past mistakes being repeated, leading to the newco finding itself in the same situation further down the line. However, using a Pre Pack Administration provides the opportunity to look at past decisions with the benefit of hindsight and assess what went wrong. This will allow for the development of a strategy going forwards and ensure that the new company goes on to enjoy a healthy and prosperous future.
The Pre Pack Administration Process
- Consider the Options
- When a company is faced with financial difficulties, the first step is to establish the situation and assess what options are available. The best way to do this is to contact a Wilson Field Finance and Restructuring Advisor and explain your situation. A Wilson Field consultant can then come to meet you anywhere in the country for a thorough face to face analysis of the company’s circumstances. The consultant will consider and explain various options including refinancing, a Company Voluntary Arrangement or Company Administration. If the business can be sold as a going concern and the use of a Pre Pack Administration appears to be both possible and in the best interest of creditors, the consultant will advise you on what action you need to take next in order to move the process forwards.
- Pre arrange the sale of company assets
- In a Pre Pack Administration, the assets of the insolvent company can either be sold to a new company that is under the management of the previous directors, or a completely separate party that is interested in acquiring the assets. At this stage, the board of the insolvent company will need to decide which assets they intend to buy and to make an offer for them. Bear in mind that some restrictions may be imposed on the purchase of assets because the process needs to achieve maximum realisations for the company’s creditors. For instance, it’s unlikely that the potential buyers would be allowed to purchase assets if it would leave others valueless and difficult to sell, such as purchasing components from working machinery that makes the machinery unusable and therefore less valuable.
- When making an offer to purchase either some assets or the business as a job lot, the directors should provide financial projections in order to demonstrate that the new company will be viable going forwards. These projections should cover profit and loss, cash flow and the company’s balance sheet. A company will then need to be set up in order to facilitate the purchase. A professional valuer will be employed to assess all company tangible and intangible assets and to provide a current market value given all the surrounding circumstances. The sale of the business and its assets will be advertised through various media, including specialist websites or direct contact with our database of potential buyers. Once all assets have been valued and buyers have been sourced that are willing to pay the best possible price, then the Pre Pack Administration can proceed and sale agreements can be drawn up.
- The Administrator is appointed
- Once the sale agreements are finalised the company will be placed into Administration which will allow for the sale of company assets. The assets will then be sold swiftly and the money realised will be used to make repayments to the insolvent company’s creditors on a pro rata basis, after the deduction of the costs and expenses of the Administrator. If the original company directors elected to purchase back the assets, then the seamless transition of ownership will allow for the continuation of trade with minimal disruption to staff, customers and suppliers. The Administration will then be brought to an end and the insolvent company will either be liquidated or dissolved. Under certain circumstances, the new company may even be allowed to continue trading using a similar or identical name as the previous company. However strict regulations surround this and the consequences for failing to abide by them can include imprisonment, so it’s vital that advice is sought from an independent solicitor before taking any action.
Wilson Field offer a fast and efficient service with nationwide coverage from a network of regional offices, meaning a free consultation can be arranged at a time and location most convenient to you.
If you believe your insolvent companies core business is still viable and think it may benefit from a Pre Pack Administration, contact Wilson Field today to arrange a free confidential consultation with no obligation.
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