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Pre-Pack Administration

The term “Pre-Pack” has become widely used in Insolvency circles. It is often wrongly assumed, that in a Pre-Pack the company’s assets or business are sold prior to the Insolvency. The term actually refers to an arrangement whereby the Sale of all or part of the Company’s assets is negotiated with a purchaser prior to the appointment of an Administrator. Once appointed the Administrator then puts into place the Sale either immediately on or shortly after his appointment.

The significance of this is that the Purchaser will be acquiring the Assets from the Administrator.

This is to be contrasted with the position where the existing Company Directors sell the Assets prior to the appointment of an Insolvency Practitioner. That is not a Pre-Pack it is a Sale by the Company pre Insolvency. In that type of transaction there are considerable risks to the Purchaser as the transaction could be overturned as a transaction at under value or preference once the Company has gone into Insolvency.

What is a Pre-Pack for?

Pre-Pack Administration is useful if a business needs to maintain continuity and keep trading.

What is a Pre-Pack Administration?

A Pre-Pack is an arrangement whereby a deal for the Sale of an Insolvent Company’s Assets is arranged before the Company goes into a formal Insolvency Process (usually Administration).

Will the Company’s Bank be made aware of the Pre-Pack?

Where the Company has granted a debenture over its assets, the debenture holder must be given 5 business days notice of the intention to appoint Administrators. In practice, this means that discussions will take place with any debenture holder prior to the appointment of Administrators. If a Pre-Pack is being considered, they will be made aware of it, since it will affect when and how they will be repaid.

Is a Pre-Pack Business Advertised?

The Business is usually sold with little or no open marketing. This has given rise to controversy. It is therefore vital that Specialist Professional Insolvency Valuers are used to assist in negotiating the Pre-Pack. Negotiations will normally have taken place with any Secured Creditors prior to appointment of Administrators as their consent to release Assets from their security maybe required.

Does the Purchaser pay a premium for a Pre-Pack Administration?

A premium will be paid to allow a business to continue to trade as a going concern. To that extent a Pre-Pack Purchaser will almost certainly be paying a sum towards the Goodwill of the Business. It is to be contrasted with an Asset only purchase on a Liquidation where you would not necessarily expect to see any payment for Goodwill.

Is funding available for a Pre-Pack purchaser?

There are a number of specialist finance organisation who are prepared to back purchasers of Pre-Pack Administrations. They typically look at the quality of the ongoing business and its management and are not concerned about the Purchase of a Business from an Insolvency Practitioner. If you require assistance with regard to organising such finance, whether it be in the form of factoring, HP, Lease or Sale and Lease back, at Lines Henry we can put you in touch with several specialist lenders.

How are employees affected by a Pre-Pack Administration?

Care should be taken when entering into negotiations regarding a pre-pack sale, effected immediately on or shortly after the appointment of an Administration, as the date negotiations began can have an effect on whether the employees claims will be payable by the Redundancy Payments Services or the Purchaser due to the Transfer of Undertakings (Protection of Employment) Regulation 2006 (TUPE).

Employees who are made redundant prior to the date of appointment of an Administrator can make claims in the usual way for statutory payments through the Redundancy Payments Services.

Any employees who are owed wages and holiday pay, prior to the appointment of an Administrator, can claim these from the Redundancy Payments Services by completing Form RP1. If the employee is entitled to more than the statutory limits for wages and holiday pay, then where employees are transferring to the successor company the new owner will be liable for the balance of monies owed.

Lines Henry always advise directors who are contemplating the purchase of assets/a business from an Insolvency Practitioner to seek independent legal advice on Transfer of Undertakings. The Administrator/Liquidator is not there to advise the purchaser, but to deal with the insolvency.

THIS IS A POTENTIAL PROBLEM AND SHOULD NOT BE OVERLOOKED.

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