As a director struggling financially, there are many options available to you; however, they can be tricky to understand. In this blog, we’re answering the question: what is pre-pack administration?
Pre-pack administration meaning
Pre-pack administration is a way of protecting an insolvent business from creditor action. It also means that the directors of the insolvent business or a connected party can buy the assets of the insolvent business from the administrator. When dealing with this procedure, the old company is referred to as ‘oldco’, and the new company is ‘newco’.
Once papers are signed and filed in court, an agent will start a marketing campaign for your business. This is where you can make an offer to buy the assets of your business back. Be aware though, during this period, other offers for your business could also be made from interested parties or competitors. Although this causes most directors concern, the reality in most cases is that the directors are able to successfully purchase the business assets of the old co out of administration.
If you’re considering a pre-pack for your limited company, there are many things to consider to ensure the process runs smoothly. We have a wealth of experience guiding directors through this stressful time, so don’t delay, pick up the phone.
The process is commonly used by directors who are struggling financially but do see genuine hope of the company being able to survive without the burden of legacy debt.
Can a director buy company assets in a pre-packaged administration?
Once the marketing period is over and your offer is accepted, the old company’s assets are legally transferred to the newco. At this point, a sale and purchase agreement is drawn up and signed. This means the existing directors will own the business assets within the new company.
All assets must be sold at market value. The asset value should be determined by an independent valuer.
Can I close my limited company and open a new one?
The process of pre-pack administration sale is essentially closing your company and starting a new one. Doing this has many benefits, but you must be sure that a new company will not be in the same position again. You must speak to a professional to ensure that it is the right step for you.
There are also rules around the company name that you can use for the newco. You must follow all guidelines, or you may risk the consequences.
How long does a pre-pack administration take?
There is no exact time period that a pre-pack administration takes. Instead, it depends on your personal and business circumstances. Typically, a pre-pack administration can take anywhere between 4 and 12 weeks.
Usually, at the beginning of the process, your liquidator will outline the process and let you know an expected timeframe. If you purchase your own company again, you may find that the process is completed faster.
Before you begin the pre-pack sale process, you must ensure that your insolvency practitioner has checked all elements of your business. This can help to avoid issues further down the line. Ensure they have checked for the following.
- All company debts to secured creditors and unsecured creditors
- Overdrawn directors’ loan accounts
- Personal guarantees
- Preference payments
- Wrongful trading
- Fraudulent trading
- Outstanding bounce-back loan
You must ensure that you get all of these details in writing prior to starting the pre-pack administration route. This will help to cover you in case of any issues with your existing company.
If there are further issues involved in your situation, it will likely take longer to complete the process. Ensure that you are honest with your liquidator about all aspects of your existing company.
What happens to creditors in a pre-pack sale?
As with other liquidation methods, there is a strong chance that creditors will not receive the money they are owed. This is because companies entering a pre-pack sale cannot afford to pay their debts already.
Despite there being a risk of not being paid in a pre-pack deal, some creditors may prefer this pre-pack process. This is because the company is being bought out, so the process should be completed efficiently. The creditor may choose to continue working with the newco, or they may not want to due to the financial history.
Pros of pre-pack administration
Before you think too much about the advantages of a pre-pack, you need to ensure that this process is the right one for your company. Here are some of the benefits.
- The process is fast – pre-packs are usually completed within 12 weeks.
- The pre-pack business is able to continue using the same structure but usually requires a new name.
- The brand’s image is less likely to be viewed negatively, as creditors may receive all or some of the money they are owed in a pre-pack administration.
- Directors maintain control when compared to a compulsory liquidation where directors will have no control over the insolvent company.
- Jobs are saved, which allows for continued employment for many.
Cons of pre-pack administration
As with everything, there are some pre-pack cons that you should be aware of.
- The company’s directors will need to be investigated. The investigation will look for evidence of wrongdoing that may have led the company into financial distress. If these are uncovered, you will have to face the consequences.
- Directors will need to find the money to purchase the business out of admin, this cost can be spread over some terms to be agreed.
- Creditors may not receive the money they are owed, which can affect future relationships. Creditors may no longer wish to work with the newco due to the history of the former company.
What other options do I have as a company director?
Company directors who are struggling financially will have more options available to them if they seek advice early. This is because seeking advice early is seen positively as you are adhering to your director’s duties. Failing to seek advice early could very easily leave you dealing with a compulsory liquidation, which is always best avoided if possible.
The exact options that will be available to you will depend on many factors. Some of these factors include how soon you are seeking advice and the financial situation that your company is in. Here are some other options that may be available to you.
Creditors Voluntary Liquidation
A CVL is the most common type of liquidation that directors may enter. It is usually viewed in a positive light as the director has made the decision to liquidate the company voluntarily. The company may be experiencing creditor pressure but this will not have resulted in serious action yet.
In a CVL, a director can choose their own licensed insolvency practitioner, who will assist them with company closure. Once the insolvency practitioner is appointed, they will be responsible for communicating with creditors, selling the company’s assets and closing the company.
Compulsory liquidation
A compulsory liquidation is always best avoided. As the name suggests, this type of liquidation is forced upon directors by their creditors. The process starts when a creditor seeks a winding-up petition.
Winding-up orders can only be sent by an Official Receiver, and they will also give directors a court date at the same time. Directors are expected to pay back their creditors by this date. If you cannot pay your creditors back, your company will be wound up.
Directors have very little control over compulsory liquidations. For example, they usually cannot choose their own insolvency practitioner, and they have no power over the timelines involved.
As we said, it’s best to avoid compulsory liquidation if possible. You can do this by seeking professional insolvency advice as soon as possible regarding the most suitable insolvency procedure for you. Read our blog on the different types of liquidation.
We hope this blog has been useful regarding the pre-pack administration process. We recommend that you seek professional advice early if you are dealing with an insolvent company. Please don’t hesitate to contact us if you have any questions regarding your pre-pack administration.
I'm Chris Worden, Managing Director at Director First. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice.
