Pre-packaged administration has proved to be an extremely useful mechanism to ensure the survival of a company’s trade, protection of jobs and to maximise the return to those owed money by a failed company.
So why is this? Well, firstly I should explain what a pre-pack administration is. Essentially the process involves a pre-arranged sale of an insolvent company’s business and assets, but the sale is only completed following the appointment of an insolvency practitioner as administrator of the insolvent company. Any sale will have been subject to an independent valuation to ensure that fair value is achieved and review by the appointed administrator.
The process applies to companies where there is no reasonable prospect of turning the company’s business around or the directors being able to raise sufficient funds, either from a sale of assets or from another source, to return the company to a solvent position in the long term.
From the purchasers perspective, they are provided with greater protection as they will be buying from an appointed administrator rather than a director of an insolvent company. Accordingly, the sale will be less likely to be challenged should the vendor company subsequently enter liquidation.
Typically the process involves a transfer of the business and assets of the insolvent company to another financially secure entity, whether that is a company, individual or partnership. The purchasing entity may be an unconnected third party or related to the insolvent company in some way (e.g. a management buyout).
The sale is subject to full disclosure to creditors following completion and the net proceeds are then distributed amongst creditors in an order of priority as laid down by insolvency legislation. Generally, banks/creditors with security and employees who have preferential claims benefit first, with unsecured creditors following thereafter.
So why are pre-packs used? Well, some of the key reasons are as follows:
As a firm we have successfully implemented a number of pre-packaged administration sales and all have enjoyed the benefits described above. If you would like to know more about pre-pack administration, please do not hesitate to call our team on 020 8662 6070.