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Pre Packaged Administration is a process in which the business of a company is sold under the supervision of a licensed insolvency practitioner before the company enters into the formal insolvency process of Company Administration.

The process is used in order to preserve the value of a business which is likely to be lost if the Company goes into liquidation and to preserve the jobs of some or all of the employees of the business.  The process is also designed to preserve continuity with customers and suppliers to the business.

When can a company use a Pre Pack Administration?

  • The company must be insolvent which will normally mean that the company cannot pay its bills when they have fallen due for payment even if the company's assets may exceed its liabilities. The insolvency practitioner recommending the process must be satisfied that the company has no viable prospect of recovering from its present difficulties.
  • The company's director(s) and the insolvency practitioner advising the company must be able to show that all other solutions for the company have been considered and that none of these solutions would have been likely to produce a better outcome for the company's creditors.
  • The business and its assets must be sold at a fair value and the insolvency practitioner advising the company must be able to show all interested parties that this has occurred. This means that if the company's directors wish to purchase the business and its assets they can only do so if they pay a fair price for these assets using their own funds or monies they have borrowed from other third parties or investors.

How does the process work?

The company's directors will typically instruct an insolvency practitioner to advise the company regarding its present financial position. The insolvency practitioner will undertake an assessment of the company's finances and verify the insolvent position of the company. The insolvency practitioner will also conduct checks to satisfy himself that the best option for the company is the pre pack administration and that the new company which is to acquire the business and assets of the insolvent company is likely to succeed. The insolvency practitioner will typically seek assistance from the company's accountants to provide information regarding the company's present financial position and financial projections for the new company. The insolvency practitioner will also take steps to independently verify the value of the assets of the company by appointing expert agents to value the assets so that it can be demonstrated that any sale has been undertaken at a fair price.

After the sale has completed the Company will immediately enter into formal Administration and after this has happened the company's creditors will be notified of the sale of the company's business and assets. The insolvency practitioner will prepare a formal report to the company's creditors who will be able to review and challenge the actions of the company's directors and the insolvency practitioner if they consider that the process has been conducted to their detriment.

Once all of the proceeds of sale of the company's assets have been received the company will typically enter formal liquidation. The funds which are recovered by the liquidator will be used to pay the costs of the insolvency process and the remainder will be distributed to the company's creditors.

What is the effect on the company's employees?

As a pre-pack insolvency will involve a sale of the business as a going concern this will normally mean that employees are protected from losing their jobs. The Transfer of Undertakings (Protection of Employment) regulations protect employees in these circumstances. However in the circumstances of a pre- pack insolvency it may well be necessary for the survival of the business that some employees are made redundant before the sale proceeds. While this may mean that these employees receive statutory redundancy payments and other statutory entitlements such as pay in lieu of notice etc the total payable may be considered relatively small compensation for the loss of permanent employment.

What are the downsides to a pre-pack administration?

Creditors of the company may consider they have been 'hoodwinked' by the company and its directors using this procedure. This is because creditors only become involved at a late stage in the process i.e. after the business has been transferred to a new company. Where the company's directors are the purchasers of the assets of the insolvent company and have set up a new company to carry on the former business then creditors may naturally be angry as they will be left with the insolvent company being unlikely to ever pay their debts while they can see the insolvent company's former directors trading in a new company.

It is very important that the company and its directors work closely with the insolvency practitioner advising them throughout the entire process. Directors must be fully transparent and honest with the insolvency practitioner and provide accurate up to date information when requested.

Company directors bear a heavy responsibility for undertaking their duties. When a company becomes insolvent the directors must act solely in the interests of the company's creditors. Following the appointment of an insolvency practitioner as the company's administrator the conduct of the directors will be investigated. Where misconduct is considered to have occurred the insolvency practitioner must report this to the Insolvency Service and following this report the directors could find themselves facing proceedings for disqualification as well as possible civil court proceedings to compensate the company. There is even a risk of imprisonment if there is evidence of fraud by directors.

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