In an economic climate where more and more businesses are facing difficulty, insolvency is extremely common. How insolvency is managed can make the difference between success and failure for many businesses. In recent years, pre-pack Administrations have become a popular way of allowing businesses to continue ‘seamlessly’ in the face of insolvency. That said, there are opponents to way of operating and the Government are looking closely at this option. What this means is that pre-pack Administrations in their current form may not be an option for much longer.
What is pre-packaged administration?
Pre-packaged Administrations or insolvencies, often referred to as ‘pre-packs’ facilitate the restructuring of a business prior to the declaration of insolvency. R3, the Association of Business Recovery Professionals, describes a pre-pack Administration as “an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment”. Therefore, a pre-packaged administration enables a business to be sold, either to a third party or to the existing directors without interrupting business activities.
How it works
In pre-pack Administration, a contract of sale and purchase is drawn up, and the Administrators sell the business and its assets to the new owners. What this means is that the Court protects the company during the transaction and it is allowed to continue trading. The result is that there is no reduction in value through trading interruption. This normally low cost way of transferring a business in difficulty is often an attractive option.
Pre-pack system under review
It is easy to see why the pre-pack Administration option may be the preferred solution for some businesses, irrespective of whether it facilitates the introduction of a completely new owner, or concerns a transaction taking place thanks to new funding raised by the existing directors. However, this effective and speedy way of allowing new owners to take over an existing business quickly and normally without too much negative publicity is up for review.
The Government has recently announced an investigation into pre-pack Administration that could result in the need for the communication of a pre-pack intention three days before it takes place. This notion was already proposed back in 2011, but was rejected on the basis that the negative publicity it could give rise to may serve to reduce the value of business assets.
The Government review aims to establish whether or not creditors are being disadvantaged by the current way of working. Some parties are recommending that creditors are given a greater say in how this process is managed and it has been suggested that by introducing a notice period to pre-pack Administrations that creditors would have the opportunity to air any concerns they may have, and perhaps even the chance to appoint an independent Liquidator.
Although an appropriately used pre-pack could actually strengthen the position of creditors, it is easy to see how, in the wrong hands, this system could lead to them losing out, so these concerns are understandable. Only time will tell whether or not there will be amendment to the organisation of pre-pack Administration, but it is important to act quickly if you suspect this might be the right solution for your business.
The next step
If you would like to find out more about pre-pack Administration, please contact one of our team.