Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
Pre-pack administration is a rapid insolvency process where the sale of a company’s business or assets is agreed upon before an administrator is formally appointed.
Negotiated discreetly between company directors and a prospective buyer, with the guidance of insolvency practitioners, pre-packs aim for a swift business transition and to preserve value, jobs, and supplier relationships.
However, pre-packs have attracted criticism due to potential opacity and concerns over fairness to creditors. The practice often involves selling the business to existing directors or stakeholders, raising questions about whether creditors receive the best possible return. While pre-packs can be a legitimate rescue tool, their effectiveness is contingent on transparency, rigorous scrutiny, and adherence to strict regulations.
Key features of pre-pack administrations include:
Pre-negotiation of the sale, often to a connected party such as existing management
Valuation and potential marketing of assets prior to administration
Immediate execution of the sale upon the administrator’s appointment
Continuity of business operations with minimal disruption
Potential preservation of employment through transfer of staff to the purchasing entity
Understanding Pre-Pack Administration
The process, while legal and prevalent in the UK, is closely scrutinised to ensure that it is conducted fairly and in the best interests of all parties involved.
Pre-Pack Administration: Process
The process of pre-pack administration typically unfolds as follows:
Step
Description
1. Appointment
Company appoints insolvency practitioners (IPs) to advise on pre-pack viability
2. Valuation
Creditors informed about administration and pre-pack sale with a detailed report
3. Marketing
IPs may discreetly market the business or assets to potential buyers
4. Offers
Interested buyers, potentially including existing management, submit offers
5. Agreement
Sale agreement is prepared with selected buyer
6. Administration
Company enters administration; administrators oversee sale
7. Notification
Creditors informed about administration and pre-pack sale with detailed report
8. Distribution
Sale proceeds distributed to creditors (secured, preferential, then unsecured)
9. Outcome
Business continues under new ownership or closes if only certain assets were sold
Pros and Cons
Pros
Preservation of Jobs: Pre-pack administration can help safeguard employee livelihoods by maintaining business continuity.
Swift Resolution: This process is designed for rapid execution, minimising operational disruptions and uncertainty.
Stakeholder Protection: Suppliers and customers can experience minimal disruption to their business relationships.
Debt Restructuring: By isolating the old company’s debts, a pre-pack allows a fresh start for the new entity.
Cost Efficiency: Often less expensive than traditional administration, pre-packs can optimise recovery.
Reputation Management: Lower public profile can help protect the business’s image.
Cons
Valuation Disputes: Creditors might disagree with how the business is valued, feeling their interests are undervalued.
Overlooked Due Diligence: In a rapid sale, especially to a third party, there’s a risk of not conducting thorough due diligence.
Creditor Concerns: Without a court process, creditors, especially unsecured ones, may feel their interests are ignored. They’re often informed late in the process, leading to dissatisfaction.
Risk of Repeat Mistakes: If the same directors who managed the struggling company buy it back, they might repeat past mistakes.
Reputational Risks: Suppliers and others might view the process negatively if they believe proper procedures weren’t followed.
Financing Challenges: Getting finance for a pre-pack can be difficult and may not always succeed.
Contractual Uncertainties: Existing contracts may not transfer seamlessly to the new entity, leading to potential disruptions.
What’s the Role of Insolvency Practitioners in a Pre Pack Administration?
Insolvency practitioners (IPs) play a crucial role in pre-pack administrations, balancing the interests of all stakeholders while ensuring transparency and compliance with regulatory guidelines, particularly Statement of Insolvency Practice 16 (SIP 16)[1]Trusted Source – The Insolvency Practitioners Association – Statement of Insolvency Practice 16: Pre-Packaged Sales in Administrations. Their key responsibilities include:
Assessing the company’s financial situation and determining if a pre-pack is viable.
Developing a tailored strategy for the pre-pack process, including marketing the business.
Valuing the company’s assets to ensure fair pricing and equitable returns for creditors.
Facilitating the pre-pack sale and coordinating with relevant parties.
Providing detailed disclosure to creditors through the SIP 16 statement.
Overseeing the distribution of sale proceeds in accordance with UK insolvency laws.
SIP 16 emphasises the importance of transparency, particularly in connected party transactions. IPs must provide a detailed explanation of why a pre-packaged sale was undertaken, including:
The marketing strategy used and its justification
Valuation details and the rationale behind them
Information about the purchaser, especially any connections to the insolvent company
Details of the transaction, including consideration and payment terms
The 2019 High Court case of Re Moss Groundworks Limited [2019] EWHC 2621 (Ch) underscored the importance of proper marketing in pre-packs. The court ruled that administrators must take reasonable steps to expose the business to the market, even given the time pressures of a pre-pack. This sets a precedent for more rigorous marketing expectations in pre-pack administrations.
What is a Pre-Pack Pool?
The Pre-Pack Pool is an independent group that helps to make sure that pre-pack sales to connected parties are fair and transparent. They do this by reviewing the sale and making sure that the connected party is financially stable, that the sale price is fair, and that the sale was done in a way that is open and competitive. This helps to protect the interests of creditors and other stakeholders.
Qualifying Evaluator’s Report: Ensuring Fair Pre-Pack Sales
A Qualifying Evaluator is an independent professional tasked with reviewing and providing an opinion on proposed pre-pack sales to connected parties. This role was introduced by The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, which came into force on 30 April 2021.
This evaluation entails a thorough review of various factors, including:
Financial Viability of the Connected Party
Valuation Methodology
Transparency and Fairness of the Sale Process
What Happens to Staff in a Pre-pack Administration?
For staff, the specific impact of a pre-pack administration can vary, but key points include:
Transfer of Employment: Employees may be transferred to the new owner of the business under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE protects employees’ terms and conditions of employment, ensuring they are transferred to the new employer. This means that, in many cases, employees will keep their jobs under the new ownership with the same terms and conditions.
Redundancies: If the entire business is not sold or if the new owner does not require all current staff, redundancies may occur. Employees made redundant are entitled to certain rights, including redundancy pay (subject to eligibility criteria such as length of service), notice periods, and consultation.
Arrears of Pay and Other Entitlements: If there are arrears of pay or other entitlements (like holiday pay), employees may claim these from the National Insurance Fund (NIF), up to a statutory limit. This can include redundancy pay, unpaid wages for up to 8 weeks, up to 6 weeks of holiday pay, and certain other entitlements.
Employees affected by a pre-pack administration should seek advice and information specific to their situation, as outcomes can vary widely depending on the details of the sale and transfer.
What Happens to Shareholders in a Pre pack?
In a pre-pack administration, shareholders often find their shares becoming worthless or significantly reduced in value. The value of their shares often plummets to zero as the company’s assets are liquidated to settle debts.
Due to their position at the bottom of the repayment hierarchy, shareholders receive any residual funds only after all creditors have been fully compensated, a scenario rarely realised in insolvency cases. Once administrators take control, shareholders lose decision-making authority. Challenging the pre-pack sale is generally restricted to instances of administrator misconduct.
While there’s a possibility for shareholders to invest in the new company, especially if connected to the previous owners, this is a separate transaction and doesn’t restore their original shareholding.
Is Pre-Pack Administration Right for Your Company?
Pre-pack administration may be a viable option if:
Your business has a strong underlying core but is struggling with unsustainable debt
There’s a risk of rapid value deterioration if the business ceases trading
You have key contracts or customers that might be lost in a prolonged insolvency process
There’s a genuine prospect of preserving jobs through a quick sale
However, pre-packs aren’t always the best choice. You should consider alternatives if:
Your business model isn’t viable in its current form and needs significant restructuring
There’s a realistic chance of turning the business around without formal insolvency
Creditors are likely to achieve a better outcome through a different insolvency procedure
It’s important to compare pre-pack administration with other options. These might include:
If you need help understanding the best way forward for your company, use the live chat during working hours, or call us on 0800 074 6757. We’ve helped thousands of directors navigate difficult financial circumstances.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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