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

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.”

Consortia Service Group

Kelly Burton • Service Agency • Pre-Pack Administration

A Cardiff security specialist has been bought out of administration saving all 44 jobs.

Zenith Security Specialists Limited was set up in 2009 providing manned CCTV security systems to national and private firms, local authorities and small businesses.

Trading as Consortia Service Group, the company was based at Cardiff Bay Business Centre and was taken over in January 2015 by director Ozma Nasir with a view to expanding the business.

Administrators Kelly Burton and Joanne Wright from Sheffield business turnaround experts Wilson Field were appointed joint administrators on 17 May after the company faced mounting pressure from HMRC in respect of PAYE and VAT arrears.

Miss Masir took advice from Wilson Field and the business was sold in a pre-pack administration to Consortia Services Group Limited as a going concern saving all 44 employees’ jobs.

Kelly Burton from Wilson Field said:

“Unfortunately, a number of the inherited on-going contracts were unprofitable. Despite attempts, the company did not have sufficient time to turnaround the business and was struggling to service both its on-going overheads and significant HMRC liabilities.

“Attempts were made to source further additional funding proved impossible and so the decision was taken to enter administration.

“Following discussions with the director, the business was sold as a going concern, safeguarding all 44 employees’ jobs and offering a better return for the company’s creditors than alternative options.

“The new company will be under the same management offering the same standards of service to its customers.”

Scottish Pub Chain

Kelly Burton • Leisure & Hospitality • Pre-Pack Administration

The director initially approached Wilson Field for assistance with the drafting of a Company Voluntary Arrangement (CVA), following HMRCs refusal to allow the company a time to pay agreement. Wilson Field drafted a CVA proposal, which was rejected by HMRC, who then issued a winding-up petition.

Wilson Field then advised the director to his remaining options, of which placing the company into Administration was one.

Due to the petition, the director was unable to appoint administrators. However, following protracted discussions with the company’s debenture holder, it was agreed that the secured creditor would appoint Wilson Field, at the request of the director.

Insolvency practitioner and director at Wilson Field, Kelly Burton, said:

“After being refused a CVA by HMRC, the company received a winding-up petition and we were appointed Administrators after speaking with the debenture holder.

Although it was a tricky start, there was a good outcome as the assets and business were sold and 75 employees kept their jobs.”

A licence to occupy was granted to an associated company to trade the pubs, whilst a sale could be finalised post appointment.

The sale was completed to an associated party a number of months after appointment, and secured over 75 jobs.

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