Can an insolvent business make a fresh start in a new limited company, potentially using assets from the old one?

How can a pre-pack administration help?

  • It can allow the business to continue in a new limited company without the old one’s debts.
  • Potentially preserve jobs of company staff.
  • Allows company assets to be repurchased at market value.
  • Potentially provide creditors with a higher return.

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    Pre-pack administration

    Pre-pack administration could be a potential solution if a company has a viable business model but is struggling with large, unmanageable amounts of debt. Entering pre-pack administration could give the business a fresh start in a new limited company.

    What is a pre-pack administration?

    Pre-pack administration is a procedure available to some insolvent companies if the core business can be rescued as a going concern, or it’s deemed to be in the creditors’ best interests. A pre-pack administration process involves a pre-arranged sale of all or some of the assets from the insolvent company to a new company, often called 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 interested in purchasing the assets.

    The assets must be bought at market value as determined by an independent professional valuer to achieve maximum realisations for creditors.

    Once the sale of company assets is arranged, the company is placed into administration, and the sale of the assets takes place. The assets are sold immediately after the company enters administration, so the disruption to trade is often minimal.

    Any assets owned by the original company not sold in the pre-pack arrangement would be realised through other means, and the original company would then be closed. The cash realised through the sale of company assets would then be used to make repayments according to a prescribed order of priority after deducting an administrator’s costs and expenses.

    How long does an administration last?

    When a company decides to enter administration, the appointed administrator has eight weeks to submit their proposals to any creditors. There is no one-size-fits-all timeframe for how long administration takes from that point, but once the proposals are approved, the process can take up to 12 months to complete.

    The length of time it takes to complete an administration often correlates with the size of a company. Larger companies typically take longer to complete.

    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:

    • Higher potential return to creditors
      The use of a pre-packaged administration generally results in a higher return for creditors instead of liquidation. All assets are bought at in situ market value, and consideration will often be paid for the brand, goodwill, and other intangible assets.
    • Could help preserve jobs
      Pre-pack administration can preserve the jobs and livelihoods of the company’s staff and ensure that the business survives, so it can continue trading with its current suppliers.
    • Provides continuity
      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 brand’s reputation.
    • May allow the brand to continue
      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.
    • Allows directors more control
      A pre-pack administration may allow directors more control over the process than in other insolvency procedures. If they stay in control of the business in its newco, it provides the opportunity to use their experience to avoid the pitfalls that befell the oldco, benefiting the newco as it moves forward.

    Creditors may believe a pre-pack administration would only benefit the newco by allowing it to carry on trading, apparently unencumbered with its previous debts. However, this is not necessarily the case, and the use of a pre-pack administration is often an effective way to give creditors a better return and save viable aspects of a company simultaneously.

    We don’t charge an upfront fee or indemnity cover for administrations. Our fees are deducted from the monies realised by the business’ sale, as long as the assets have significant value. Creditors would need to approve these fees.
    Pre Pack Administration

    Common concerns around pre-pack administration

    While commercially viable aspects of a business can be saved, pre-pack administrations are not entirely without their pitfalls, and the following concerns are common around pre-pack administration:

    • Has a negative stigma
      Directors may be concerned old suppliers won’t wish to trade with the newco. This can happen, but often suppliers (even if burdened with heavy debts because of the pre-pack administration) are keen to retain the business moving forward and may supply on a pro forma basis (i.e., not allowing credit). Over a period of time, this gives suppliers the opportunity to make a profit, which may go some way to mitigate losses suffered in the oldco.
    • No guarantee that lessons will be learnt
      There could be concerns amongst directors that continuing to trade using the same business model and management structure as the oldco could lead to repeats of past mistakes, 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 allows them to develop a strategy going forward and help ensure that the new company enjoys a healthy and prosperous future.
    • Requires additional funding
      If the directors plan to continue the business in a newco, then in addition to covering the IP’s costs, the directors need to source the funds necessary to fund the repurchase of the company assets. The IP must ensure the assets are sold at market value, so this can be a costly part of the process.
    • Director’s conduct will be investigated
      Once the oldco is liquidated, the Administrator will investigate the director’s conduct before and during the insolvent period. Speak to us, and we’ll assess your circumstances and discuss any potential implications in detail.
    A company wishing to enter a pre-pack administration must prove that it would be in its and the creditors’ best interests as opposed to other insolvency options.

    The pre-pack administration process

    Applying for a pre-pack administration has several stages.

    Consider the company’s options
    When a company is faced with financial difficulties, the first step is to assess the situation and establish what options are available.
    Seek professional advice
    To discuss your options, or if you’re unsure of how to proceed, contact Wilson Field and explain your situation to one of our initial advisors. Our consultants can then consider and outline various options, which could include refinancing, a Company Voluntary Arrangement (CVA), or company administration.

    If the business can be sold as a going concern, and the use of a pre-pack administration appears to be possible and in the best interest of creditors, the consultant will advise on what action you need to take to proceed.
    Drawing up a pre-pack administration plan
    Once it’s decided that pre-pack administration would be the best course of action, the IP assesses the company’s assets and liabilities, and the directors should start putting together a Statement of Affairs for the company.

    In a pre-pack administration, the insolvent company’s assets can either be sold to a new company under the previous directors’ management or a separate party interested in acquiring the assets. At this stage, the insolvent company’s board needs to decide which assets they intend to buy, make an offer for them, and ensure the potential buyer has the funds available for the procedure.

    If the IP decides a pre-pack administration would be the company’s best option, and the business could continue in a new limited company (newco), they will construct a plan for the process. If the plan is to sell the business to an existing company, the IP will require the oldco’s accounts and financial information. Both these are to support the case that the newco would be viable.
    Raising finances
    If it’s decided the business could continue in a newco, finance may need to be raised to fund the acquisition of the business and its assets.
    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 potential buyers would be allowed to purchase assets if it would leave others valueless and difficult to sell. For example, purchasing components from machinery that makes it unusable and therefore less valuable.
    The administrator is appointed, and the pre-pack sale starts
    Once the sale agreements are finalised, the company enters administration, allowing for the sale of company assets. The assets will then be sold swiftly, with the realisations used to make repayments to the insolvent company’s creditors according to a prescribed priority after cost deductions and the administrator’s expenses.

    If the original company directors elected to purchase back the assets and operate the business through a newco, then the pre-pack sale can go through. The seamless transition of ownership will allow for the continuation of trade with minimal disruption to staff, customers, and suppliers.
    The old company ceases to exist
    Finally, once the Administrator has undertaken all of their statutory duties, the administration ends, and the insolvent company is usually liquidated or dissolved.

    Under certain circumstances, the new company may be allowed to trade using a similar or identical name as the previous company.
    Strict regulations surround the reuse of company name, and the consequences for failing to abide by them can include imprisonment. It’s vital that advice is sought from an independent solicitor before taking action.

    How much does administration cost?

    There is no set cost for a company administration, and the fees vary depending on the company’s circumstances. These circumstances include the amount of debt in the company and whether its assets are subject to fixed or floating charges.

    You have several options to help a company pay for an administration:

    • The company continues trading with the Administrators in control, with the profits generated going towards the cost of the administration.
    • The funds generated from the sale of company assets can be used to cover the insolvency practitioner’s costs.
    More on paying for administration

    In summary

    Pre-pack administration allows for the sale of an insolvent company’s assets to a new company. The process enables businesses with a viable structure to continue trading in a new limited company unencumbered by the debts and liabilities of the old one. While creditors may be concerned the process could be used to help the insolvent company’s directors get out of paying what they owe, creditors may receive a better return than if the company was liquidated. The process is highly regulated and can only go ahead if the company can prove that it would be in its and the creditors’ best interests.

    How we can help

    If you believe your insolvent company’s core business is still viable and think it may benefit from a pre-pack administration, contact us. We can assess your business and deem whether it’s suitable for administration and if a pre-pack would be appropriate. We will have the company’s assets independently valued and help create an administration proposal for your creditors. If your pre-pack is approved, it will allow you to set up a newco and transfer the assets while allowing the business to continue trading with minimal disruption.

    We can arrange a free, confidential consultation with no obligation and offer a fast, efficient service nationwide.

    Beverley Horton Christopher Callaghan Stephen Hall

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