Pre-pack administration is a deal for the sale of an insolvent company, which is put in place before the company goes into administration. The deal of the sale is usually worked out before a company appoints an insolvency practitioner and is then quickly executed once the appointment has been made. It is common for the business to be sold with little to no open marketing. Whilst secured creditors are usually informed of the pre-pack as they are likely to have to release their security, unsecured creditors are not usually made aware of the deal until after it has been completed.
Before a pre-pack administration sale can be made, the company’s assets must be independently valued.
How does it work?
In order for pre-pack administration to
be successful, plans for it must be rolled out as soon as it looks like a
company may be insolvent. Before it can take place a number of
preparations need to be made. This includes finding a buyer for the
business. The buyer can include some or all of the current directors but
it can also be someone that has no involvement in the existing
business.
The business’s assets will also need to
be valued independently as it is important that the interests of the
creditors are protected. Before the sale can take place, the purchaser
must also ensure they have the capital ready and that they have the
means to fund cash flow of the new company.
Once the purchase has been set up and
agreed, the company can be placed into administration. The sale will
then take place seamlessly.
How can it benefit companies?
One of the main benefits of pre-pack administration
is that it allows businesses to keep trading and retain their value.
When word gets out of a company’s financial difficulties, the staff,
suppliers and customers tend to abandon ship, with customers and
suppliers looking elsewhere to take their business. By organising a
pre-pack, a company can bring about the sale before these problems
occur.
Pre-pack administration can also help to
save employees’ jobs and reduce redundancies. According to research by
R3 (the trade body for Insolvency Professionals) in 92% of pre-pack
cases, 100% of the jobs are saved. This is a greater percentage of the
jobs saved than when a business is sold, which comes in at just 65%.
Pre-pack administration can help to save employees’ jobs.
Selling a company via pre-pack
administration can also provide a better return for secured creditors
when compared with the other option of the company being liquidated.
When a business is going through insolvency, it is to be expected that
creditors will not receive the entire amount they are owed, therefore
making it important to work towards achieving what they should
reasonably expect. The average return for secured creditors in pre-pack
cases is forty two per cent, compared to twenty eight per cent for
business sales.
Ozg NBFC Experts
Ozg Business Resource Center
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