It’s a term you hear a lot about in the media these days.
Consequently, lots of people might think that a Pre-Pack is a new approach or change to the rules to allow insolvency practitioners additional leeway to rescue companies they didn’t previously have.
The truth is we always did — there’s nothing new about Pre-Pack — it’s just a more efficient and effective administration procedure for viable companies.
A pre-pack administration is a legal mechanism that allows the assets of one company (The Jane Smith Co. for example) to be transferred to a new legal entity (Jane Smith Limited) without the debts of the first company coming with them.
It allows the business to continue trading without interruption and usually allows staff to retain their jobs and their contractual employment rights.
The new company does have to pay a fair open market value price for the assets including any existing goodwill and the administrator has to be satisfied that any asset sale achieved the best possible price for creditors.
While the process is simple, it’s not easy and a pre-pack has to be carried out in a specific way.
It requires planning, third party valuations and a licensed insolvency practitioner to oversee the project.
Like every other aspect of a pre-pack administration, the marketing and selling of a business are covered in detail by the Statement of Insolvency Practice 16 (SIP 16).
How does it work?
The first essential stage of a pre-pack is to officially instruct us to act on your behalf.
Once engaged, we can formally place your company into administration and begin the process starting with a full review of the company’s financial affairs.
We use independent third-party agents to value the assets and goodwill of the business, which is then marketed for sale at a fair price.
A new company (newco) is formed which then makes an offer to purchase the assets and goodwill at the open market value.
The independent agents review all offers received and presuming yours is the highest then you’ll gain ownershipthe.
Most small or medium-sized companies have a greatly reduced value outside of their existing management team, but you should still carefully consider the value of your offer.
If accepted, the company formally enters administration and the administrator completes the sale of the assets and goodwill to the newco.
The process can be completed in as little as ten days or it could stretch to five weeks depending on requirements.
What are the benefits?
- Stops legal action against the company from creditors and HMRC
- Company owners remain involved in the process right up to the point of administration
- Allows for continuity of business
- All historic debt is written off — with the exception of personal guarantees
- All finance and lease agreements and employee claims can be terminated
- Newco can use a similar (not the same) name to the old company if the process is followed properly
- Far quicker process compared to a Company Voluntary Administration (CVA) which can last up to five years
- Creditors could get a better deal out of pre-pack than other schemes
- The Newco is likely to be liable for all employees’ contractual rights which will continue under TUPE — Transfer of Undertaking (Protection of Employment)
- If historic problems aren’t addressed or management re-organised then the newco could make the same mistakes as the old company — with similar results
- The administrator has to prepare a report for The Insolvency Service on the conduct of the directors and officers of the old company so there could be issues if they are found to be at fault — especially if they are going to be involved in newco in any capacity
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