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

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.

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

National Videogame Arcade

Kelly Burton • Leisure & Hospitality • Administration

Image from GameCity.org [http://gamecity.org/]

The National Videogame Arcade is a unique national centre which is dedicated to history and development of computer and video games. The museum itself contains many rare and original videogames and consoles as well as a Toast Bar which serves a wide array of toast-based snacks.

Over its time, it has also been involved in working in collaboration with Arts Council England, Times Educational Supplement, Wellcome Trust and the British Library to name a few. These projects and collaborations focused on developing the role of videogames in culture and education.

Home of the acclaimed GameCity festival, The National Videogame Arcade in Nottingham, sadly fell into cash flow difficulties earlier this year despite an increase in its footfall. An eleventh hour investment by a director-led consortium, led by director Iain Simons, saved all 40 jobs at the increasingly popular tourist attraction and museum.

The cash flow difficulties led to the destination being taken into administration, Wilson Field’s Andy Wood and Lisa Hogg were appointed as joint administrators on 19^th August 2016.

Andy Wood, an insolvency practitioner at business turnaround and insolvency specialist, Wilson Field, said;

“The investment story behind the consortium is based on the passion that Iain Simons and his staff have for the GameCity project.

“We were appointed as administrators after the company fell into financial difficulties, despite growing in popularity. The consortium of investors could clearly see the potential to turn the business around and with support from the staff, GameCity has a new future.”

Director of GameCity and investment consortium leader, Iain Simons, was very happy with securing the last minute investment and the service he received from ourselves; “The NVA is like no other facility within the UK and is rapidly growing in popularity. It was devastating to us when we realised that the business was in financial difficulty, but we knew it could be overcome.

“I have to give all credit to the staff here who volunteered to work without pay when we announced that the business was in trouble and this undoubtedly allowed us the time to pull together a consortium of investors to give the facility a bright new future and secure those jobs.

“GameCity is rapidly picking up pace and the Toast Bar, National Videogame Arcade and our collaborations with new partners in the UK and beyond are proving to be just as popular as we’d hoped.”

For more information on GameCity visit http://gamecity.org and for further information about our insolvency procedures, call us on 0800 901 2475.

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.

Mercer Group

Kelly Burton • Construction & Engineering • Pre-Pack Administration

All 38 jobs have been saved at a Bolton construction trade company after administrators at Wilson Field sold the company in a pre-pack deal to existing management.

Joint administrators Kelly Burton and Lisa Hogg from Wilson Field were called in by directors of Mercer Group on 7 July 2017.

The company, based at Turton House on Wellington Road in Bolton, had suffered due to serious underpayments from clients resulting in VAT and PAYE arrears and issues with HMRC.

Mercer Projects Ltd bought the company for an undisclosed sum with all 38 staff from across the group being transferred to the new company under TUPE.

As well as saving jobs, estimated redundancy and holiday pay totaling almost £97,000 were mitigated resulting in a better return to creditors.

Kelly Burton, director and insolvency practitioner at Wilson Field, said;

“We are pleased that the sale of the company to Mercer Projects has resulted in all 38 jobs being secured and that the business will continue to trade.

“We determined that a pre-packaged sale would be in the best interests of creditors.”

Director Alison Mercer said;

“This has been an uncertain and very difficult period for Mercer Group but advice from the administrators at Wilson Field has made the whole process less stressful. Their communication and procedure and working closely with them has meant we have been able to keep all 38 staff.

“With our strong reputation within the sector as a multi trade company and with the same staff team, we were confident that the company has a viable future.”

Alison added;

“It is very frustrating when events which are outside of your control threaten the very existence of your business and the jobs of a loyal workforce. Working with our advisors and staff, the future of Mercer Projects now looks very positive and we are in a position to offer our customers the same high quality of products and service.”

The companies began as Mercer Brothers Limited in 2004 and D Mercer and Sons Ltd in 2009 as plastering only businesses and quickly evolved through training and business expansion into a multi-trade company, to become known as Mercer Group.

During a period of quadruple growth between 2012 and 2013, the company relocated its offices to Bolton and undertook work in both the public and private sectors including residential, educational, medical and commercial properties.

Areas of expertise included demolition, plastering, screeding, tiling, flooring, joinery, painting and decorating, structural and ground works and roofing.

It also worked in partnership with a number of local colleges and schools to provide apprenticeship schemes for 16-24 year olds to gain experience, skills and qualifications in the construction industry. Mercer Projects has continued to provide apprenticeships and currently has 4 apprentices who are working on our construction sites.

Gosschalks Solicitors of Hull advised and dealt with legal work with asset sales through Ian Maycock of Charterfields Surveyors in Manchester.

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