Insolvent companies who sell their assets to a third party as soon as they go into administration, are said to be the subject of a Pre Pack Administration. This process tries to ensure the business can continue to operate under the new management, and the money raised from the sale of the assets can be used to settle as much of the previous company’s outstanding debts as possible.
Companies and their advisors may decide to opt for a Pre Pack Administration if it is unlikely that the business will be able to trade through the administration process, and the sale of assets will help the company remain viable until a buyer can be found. They are also one way of allowing the management of a former company to buy the assets of that business, and form a new company, without the financial problems that made the old business insolvent.
Companies who use the Pre Pack Administration process benefit by using the value of their assets to eliminate their current business debt, and emerge from the process as a much more viable business, which is able to carry on trading under new management. Employees are usually transferred to the new company, so they are able to keep their jobs, working for the new business.
Pre Pack Administration have come in for criticism from some parties, particularly those that are owed money by business that go through the process. They claim that creditors have little or no say in what is agreed as part of a Pre Pack Administration, and it is simply a way for businesses to wipe out all of their debts and continue trading, with the creditors being the ones who lose out. Any deal that is done as part of a Pre Pack Administration leaves creditors with no other choice than to accept the outcome and what it means for them.
However, many Pre Pack Administrations are arranged with the knowledge and assistance of Insolvency Practitioners, and are actually designed to get as much value for the creditors as possible, while also ensuring the continuity of the business. If the company simply went through the formal insolvency process, a number of factors could mean the creditors would actually be worse off.
The Pre Pack Administration process has always been an option for insolvent businesses, but it has received much more attention recently, simply due to the larger number of failing business who seek to benefit from it. If your business is in trouble, and you feel a Pre Pack Administration may be the solution, make sure you get professional advice as soon as possible.
