![Advantages & Disadvantages of a Pre-Pack Administration](https://www.companydebt.com/wp-content/uploads/2024/04/shutterstock_144790756-11.jpg)
What is an Administration Sale?
When a company enters administration, the sale of its business and assets becomes one possible outcome, whether through an ‘open market’ sale or a pre-packaged arrangement.
The goal is to create a distribution for creditors while allowing the new venture a better chance of survival without the historic debts.
We’ll explore:
- How administration sales work
- What role the administrator plays
- How these sales affect directors, your employees, and your creditors
Types of Administration Sales
- In an open sale, the administrator puts a business on the market after their appointment. They’ll advertise it publicly, aiming to attract potential buyers and maximise returns for creditors. This process can take several weeks or even months, depending on the complexity of your business and market conditions.
- A pre-pack sale, on the other hand, is arranged before the administrator is officially appointed. In this scenario, your business assets are valued and marketed discreetly. A buyer is found – often existing directors or shareholders – and the sale is executed immediately after the administrator takes control.
Both types of sales have their advantages and challenges:
- Open sales may fetch higher prices but can lead to business disruption and value erosion over time.
- Pre-pack sales are quicker and can preserve business continuity, but may face scrutiny over fairness to creditors.
What are the Sale Implications for Key Stakeholders?
For Directors
For you as a director, the sale means losing control of your company. If it’s an open sale, you’ll have little say in who buys the business or for how much. In a pre-pack sale, you might have the opportunity to buy back the business, but you’ll need to fund this purchase yourself.
You should also be prepared to be scrutinised for your past actions. The administrator will investigate the company’s affairs, and any misconduct preceding insolvency could lead to disqualification or personal liability.
For Employees
Employees face tremendous uncertainty during this period. Those retained during administration become preferential creditors, improving their chances of receiving owed wages. If they’re transferred to the new owner, their employment contracts are protected under TUPE regulations. However, redundancies are possible, and affected staff may need to claim from the National Insurance Fund.
For Creditors
For creditors, the impact varies:
- Secured creditors have the first claim on the sale proceeds.
- Unsecured creditors often face significant losses but can submit claims to the administrator.
- Preferential creditors (including some employee claims) rank above unsecured creditors.
>>Read our full article on secured vs unsecured creditors
The Sale Process
If it’s an open sale, the administrator will:
- Value your company’s assets
- Market the business to potential buyers
- Negotiate with interested parties
- Complete due diligence
- Finalise the sale
This process typically takes several weeks, but can be longer for complex businesses. During this time, the administrator may make operational changes to improve your company’s financial outlook.
For a pre-pack sale, much of this work happens before the administrator’s formal appointment. The sale is usually completed within days of the administration beginning.
In both cases, the administrator must justify their actions to creditors. They’ll provide a detailed report explaining why the chosen sale method was in the creditors’ best interests.
Time is critical in these sales. The administrator can’t trade at a loss, and after 28 days, they become personally liable for employment contracts. This urgency can affect the sale price, but it’s balanced against the risk of the business’s value eroding if left unsold for too long.
Key Legal Considerations for Potential Buyers
- Unlike standard business sales, you won’t get any warranties or representations from the seller. This means you’re taking on more risk, so you’ll need to be extra vigilant in your assessment of the business.
- You’ll also face time pressure. Administrators often need to move quickly to preserve value, which can limit your ability to conduct thorough due diligence.
- Existing staff may transfer to you under TUPE regulations, along with their employment rights and any outstanding liabilities. You’ll need to carefully consider which employees are crucial for the business going forward and understand the potential costs involved.
- You’ll need to verify what assets are actually included in the sale and whether there are any claims against them. This is particularly important for things like intellectual property and leased equipment.