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If a business has a viable structure, but the company is struggling with large, unmanageable amounts of debt, it may benefit from a fresh start in a new company. If this describes your situation, and you wish to use assets from the existing company, then pre-pack administration could be a viable solution.
What is a pre-pack administration?
A pre-pack administration is a procedure available to some insolvent companies if it’s deemed to be in the best interest of creditors. It involves the pre-arranged sale of all, or some of the assets from the insolvent company into a new company, often referred to as 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 which has an interest in purchasing the assets. The assets, however, must be bought at market value as determined by an independent professional valuer, in order to achieve maximum realisations for creditors.
Once the sale of the company’s assets has been arranged, the company is placed into administration, and the sale of the assets takes place. The assets can be sold very quickly once the company enters administration, so often, the disruption to trade is 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 to creditors on a pro-rata basis after deduction of administrator’s costs and expenses.
How long does an administration last?
When a company decides to file for administration, the appointed administrator has eight weeks to submit their proposals to any creditors. There is no one-size-fits-all when it comes to how long administration takes from that point, but once the proposals are approved, the process can take several months 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:
- The use of a pre-packaged administration will generally result in a higher return for creditors as opposed to liquidation. All assets are bought at in situ market value and consideration will often be paid for the brand, goodwill and other intangible assets.
- Pre-pack administration can preserve the jobs and livelihoods of the company’s staff as well as ensure that the business survives, which means it can continue to do business with its current suppliers.
- 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.
- 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 and reputation.
Many creditors believe that a pre-pack administration would serve only to benefit the newco by allowing it to carry on trading, apparently unencumbered with its previous debt. However, this is not necessarily the case, and the use of a pre-pack administration is often an effective way to give a better return to creditors and save viable aspects of a company simultaneously.
Common concerns of pre-pack administration
While commercially viable aspects of a business can be saved, pre-pack administrations are not entirely without their pitfalls. The following are common concerns of directors who are considering a pre-pack administration:
- Directors may be concerned that old suppliers will not wish to trade with the newco. Sometimes this may be the case, but often suppliers (even if burdened with heavy debts because of the pre-pack administration) are keen to retain the business moving forward and will supply on a pro forma basis (i.e. not allowing credit). Over a period of time, this gives suppliers the opportunity to earn profits, which may go some way to mitigate losses suffered in the oldco.
- Often, there can be concerns amongst directors that continuing to trade using the same business model and management structure as the oldco could lead to past mistakes being repeated. 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 will allow for the development of a strategy going forward and ensure that the new company goes on to enjoy a healthy and prosperous future.
The pre-pack administration process
Applying for a pre-pack administration has several stages.
- Consider the Options:
- When a company is faced with financial difficulties, the first step is to establish the situation and assess what options are available. The best way to do this is to contact a Wilson Field Advisor and explain your situation. Our consultants can then come to meet you anywhere in the country for a face to face analysis of the company. The consultant will consider and explain various options, including 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 move the process forward.
- Pre-arrange the sale of company assets:
- In a pre-pack administration, the assets of the insolvent company can either be sold to a new company that is under the management of the previous directors. Or a separate party that is interested in acquiring the assets. At this stage, the board of the insolvent company will need to decide which assets they intend to buy and make an offer for them. Bear in mind; 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 the 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.
- When making an offer to purchase either some assets or the business as a job lot, the directors should provide financial projections to demonstrate that the new company will be viable going forward. These projections should cover profit and loss, cash flow and the company’s balance sheet. A company will then need to be set up to facilitate the purchase. A professional valuer will be employed to assess all the company’s tangible and intangible assets and provide a current market value. The sale of the business and its assets will be advertised through various media, including specialist websites or direct contact with our database of potential buyers. Once all assets have been valued, and buyers have been sourced that are willing to pay the best possible price, the pre-pack administration can proceed, and sale agreements can be drawn up.
- The administrator is appointed:
- Once the sale agreements are finalised, the company will be placed into administration, which will allow for the sale of company assets. The assets will then be sold swiftly, and the money realised will be used to make repayments to the insolvent company’s creditors on a pro-rata basis, after the deduction of the costs and expenses of the administrator. If the original company directors elected to purchase back the assets, then the seamless transition of ownership will allow for the continuation of trade with minimal disruption to staff, customers and suppliers. The administration will end, and the insolvent company will either be liquidated or dissolved. Under certain circumstances, the new company may even be allowed to trade using a similar or identical name as the previous company. However, strict regulations surround this, 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 any action.
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 company. While creditors may be concerned that the process could be used for the insolvent company’s directors to get out of paying what they owe, creditors may receive a better return than if the company was liquidated. The process is very 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 is suitable for administration and if Pre-Pack would be appropriate. We will have the company’s assets independently valued and help you put together 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. All while allowing the business to continue trading with minimal disruption.
We can arrange a free, confidential consultation with no obligation. Offering a fast, efficient service with nationwide coverage, meaning a free consultation can be arranged at a time and location most convenient to you.