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’.
An Administrator is engaged to manage the sale process, ensuring that fair value is achieved for the business and assets. The process enables the directors to keep control of the company and continue trading until the appointment of the administrator, and the sale then completes shortly afterwards. This process helps to ensure minimal disruption to customers and often results in an enhanced return to creditors via a sale of assets such as goodwill.
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.
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.
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.
The pre-pack administration process
Applying for a pre-pack administration has several stages.
- Consider the company’s options
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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
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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
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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
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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
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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
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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.
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.
Case Studies
Direct Entry Solutions
Kelly Burton • Transport & Logistics • Pre-Pack Administration
A Middlesex postal service company, whose facilities could handle around 30 tonnes of post a day, has been bought out of administration saving all 25 jobs.
The 13-year-old business, which initially traded as a consultancy service supplying postal services to UK-based wholesale mail companies, has been acquired by an associated company Direct Entry Solutions Worldwide Ltd and will be operated by the existing management team.
Joint administrators Kelly Burton and Lisa Hogg of insolvency and business turnaround specialist Wilson Field were appointed to Direct Entry Solutions on 25 January.
The company had experienced a difficult trading period after diversifying from its core offering to incorporate the physical sorting of post along with returned mail management and various other mail processing services. This resulted in possible enforcement action by creditors including HMRC and the Austrian postal company Osterreichische Post.
The total value of the pre-pack administration deal is undisclosed but it includes the business and the assets of the company based on Stockley Close in West Drayton.
Kelly Burton, director and insolvency practitioner at Wilson Field in Leeds, said;
“The consequences of switching from a consultancy to processing mail involved significant investment and consequential increased ongoing costs.
“The company required a large boost in the staffing levels, a bigger premises in a more suitable location, relevant machinery and equipment for the warehouse operatives, in addition to large injections of cash.
“A number of onerous contracts also caused a pressure on cash flow and a build-up of historical debt.
“Our actions have secured all 25 jobs and brought about a better return to creditors. As the jobs were transferred to Direct Entry Solutions Worldwide, this alone saved over £27,000 in redundancy and wages.
“From what was a difficult situation has emerged a better result for creditors and staff.”
K2 Technologies Ltd and K2 Thermal Imaging Ltd
Kelly Burton • Service Agency • Administration
Wilson Field has helped secure the sale of two related North East businesses, which developed and manufactured thermal imaging equipment, as a going concern to Cenergem Limited backed by a group of local investors not associated with the current management.
Kelly Burton and Joanne Wright from Sheffield-based insolvency specialists Wilson Field were appointed joint administrators of Darlington-based K2 Technologies Ltd and K2 Thermal Imaging Ltd on 25 July 2016.
The two companies had experienced cash flow problems following to a sharp decline in the demand for their products due to increased global competition in the market over the last 18 months.
The sale, which resulted in six of the current eight jobs being saved, was achieved by Wilson Field, working alongside valuers and asset management consultants Charterfields, who handled a number of inquiries and Mark Wilkinson, insolvency partner at Shulmans Solicitors in Leeds.
Kelly Burton, director and licensed insolvency practitioner at Wilson Field said:
“During the past 12 to 18 months K2 had begun to experience increased competition in the market. Competitors had started to manufacture and sell similar products at a lower price, meaning the company had seen a sharp decline in the demand of products and a resultant shortage of cash flow.
“Our job was to realise a sale of K2 as a going concern to achieve the best return for the company’s creditors. There was significant interest by a number of parties. The resultant sale has also saved six of the eight jobs.”
K2 Thermal Imaging Ltd and its predecessors were involved in the development of three products establishing the company as a lead pioneer in thermal imaging.
The company designed and engineered three main product ranges for extensive use in the marine, firefighting and industrial sectors, allowing operators to enter smoke-filled environments to detect and rescue people with a hands-free application, therefore improving success rates in recovery.
JS Security
Kelly Burton • Other • Administration
All 42 jobs have been saved at a Cheltenham security firm after it was bought out of administration.
Joint administrators Kelly Burton and Lisa Hogg of insolvency and business turnaround specialist Wilson Field were appointed to JS Security on 10 February after HMRC threatened to wind-up the company because of accumulated tax arrears.
The company, which operated from Old Station Drive in Cheltenham, has now been bought out of administration by existing, and associated company, JS Facilities Group Limited of Cheltenham, saving all 42 jobs.
The business will be operated by the existing management team lead by managing director John Search. The total value of the deal is undisclosed but it includes the business and the assets of the Cheltenham based company.
Kelly Burton, director and insolvency practitioner at Wilson Field, which has bases in Leeds and Sheffield, said;
“Unfortunately, the security services sector is very competitive which leads to hourly rate discounting and small margins.
“JS Security accumulated tax arrears which threatened its existence. After discussing the situation with the director, I am pleased that we have found a solution which will see the business continue to trade and also all 42 employees’ jobs transferred to the new company.”
JS Security was appointed the official security provider at Gloucester Rugby in June 2013 for two-years and also won the contract to provide matchday security for the four Rugby World Cup matches at Kingsholm Stadium in September 2015.
The contracts covered match day security, including the hospitality areas, car park security and any additional security requirements.
JS Facilities Group Limited has been running for 15 years and operates throughout Gloucestershire specialising in security services for sectors including commercial, logistics security, construction, events, key holding and alarm response.
Services include remote video monitoring, control room services, lone working monitoring, security guarding, door supervisors, mobile security patrols, event security and first aid training.
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