There are a lot of options to consider when your company is facing a period of financial difficulty. There are many different types of situations in which company directors might experience financial challenges, and while there are often solutions available – especially if you take action quickly – it is not always clear which course of action represents the best path forward. In some cases, a business that cannot pay its debts might be able to negotiate with creditors and gain more time to pay. In others, company directors may determine that the business needs to close.
However, many situations allow for a third option, in which the business can be transferred to a new company and continue to operate. This can be achieved through a pre-pack administration sale of the business. This is a way to save jobs and typically offers a strong return for creditors, meaning that it may offer the best possible outcome for all parties in your situation.
Here, the company rescue experts at Company Insolvency Advice outline some of the important aspects of the pre-pack process and explain the advantages and disadvantages it offers, to help you to decide whether or not it is right for your business in its current situation. It is important to explore multiple options, as the company rescue solutions that are available to you will depend on the individual financial circumstances you find yourself in.
If you are concerned that your company won’t be able to pay its debts when they are due, or you are facing legal action by your company’s creditors, it is important to take action straight away and seek expert advice. Contact the team at Company Insolvency Advice to talk about your company’s financial situation in detail, and we will advise you on the options that are available to return you to a better financial position and rescue your company from the challenges of insolvency.
What is Pre-Pack Administration?
Pre-Pack Administration is an insolvency procedure that allows a company to sell its assets or business to a buyer before an administrator is formally appointed. This process is designed to swiftly move the assets of an insolvent company to a new owner, which can be a third party, a trade buyer, or the existing directors under a new company setup.
It aims to preserve the underlying business, minimise job losses and maximise the returns to creditors by ensuring the business continues in some form, rather than undergoing a full liquidation process. It is a popular insolvency procedure because it often ensures a better return for the company’s creditors than other, similar options – although, it is important to note that creditors are paid in an order of priority. Secured creditors receive dividends first, followed by unsecured creditors, preferential creditors and then others. As such, this process will not be suitable in all cases. Creditors will need to approve this approach in order for it to move ahead, and if they are unhappy with the proposal, company directors may need to explore alternative options.
How Does the Pre-Pack Administration Process Work?
The pre-pack administration process typically unfolds in a straightforward way, and will usually be managed by a licensed insolvency practitioner on behalf of the insolvent company. As with any insolvency process, a pre-pack administration begins with an initial consultation, in which the company directors can assess their situation and consider the options that are available. If a pre-pack administration is not suitable, a Company Voluntary Arrangement or Creditors’ Voluntary Liquidation may be the right approach. Company Insolvency Advice can present all of your options to help you choose the best path forward.
To move ahead with a pre-pack administration for an insolvent business, the board of directors must pass a resolution. From there, they can appoint an insolvency practitioner to arrange the sale of the business to a new company. If the directors of the original company want to buy the business, they should develop a business plan and financial forecasts at this stage.
After the administrator’s appointment, they will review any interest shown in acquiring the business and consider offers from potential buyers. If a buyer is found, a pre-pack deal is struck, which usually encompasses not only the existing company but all of the company’s assets (including any outstanding contracts). By the terms of this type of agreement, the sale will be completed immediately at the point that the company enters administration.
The insolvency practitioner can oversee the sale and administration process to make sure it is completed in accordance with the law, and will also file any necessary reports to creditors. At the conclusion of the process, the administrator will manage any distribution of dividends to the creditors.
What Are the Advantages of Pre-Pack Administration for an Insolvent Company?
There are several key benefits that help pre-pack administrations deliver the best outcomes for all parties involved. From the perspective of creditors, one advantage is that a pre-pack administration will often deliver a better return than other insolvency procedures. This type of sale often raises funds more quickly than selling business assets individually, as would happen in the event of a liquidation, and creditors would have to wait for the appointed insolvency practitioner to find a suitable buyer in either case.
Another benefit for the insolvent company’s creditors is that they will not need to take their own action to recover the debts they are owed. There are several types of legal action that creditors can take in pursuit of unpaid debts, including seeking a winding-up petition. These options can be difficult and expensive for creditors even if they are successful, so if a company proposes its own solution in the form of a pre-pack administration, this is the simplest way for the creditor to ensure they will receive a return.
From the perspective of company directors, a significant benefit is business continuity. When the business is sold to the new company, it will usually continue to operate, which can save jobs, ensure contracts are fulfilled and help to maintain relationships with customers. In fact, it is usually possible for directors to purchase the business themselves under a new company, which means that pre-pack administration is an insolvency procedure that enables the owners of a company to retain control over its fate.
To discuss your financial situation and the possibility of pre-pack administration, or the other company rescue options that are available in your case, speak to Company Insolvency Advice today. Call us on 0800 999 0666 or use our online enquiry form to request a call back at your convenience.