What are the advantages and disadvantages of a pre-pack administration?
A pre-pack administration is a very effective and quick way of saving a business. However, they are not usually popular with creditors because they find out the business has sold after the sale has taken place and it is then too late to do anything about it.
The term pre-pack administration is the name given to an administration where the sale of the business has been agreed beforehand and it is sold on the day of administration.
In more detail
Advantages of a pre-pack
- It can be used to save a business, allowing the business itself to carry on and have continuity with the staff and customers and also some of the creditors. It often stays in the same premises with the same or similar name.
- It is confidential before the sale takes place - this can help reduce any rumours of financial troubles and hopefully stop the business losing any customers.
- It can be good for the directors who want to buy the business back. It does give the directors or management (if they are the buyers) a second chance and hopefully they have learnt from any mistakes or have kept the business going after an unpredictable major setback. An example would be a very large one-off bad bad debt.
- It is quick so may result in a higher return to creditors. It means the business does not have to be traded under the supervision of an administrator so this can also save on professional fees.
- The brand image is better maintained. A quick, fair price sale is better to preserve the reputation of a business and the value of the goodwill.
- Historical creditors are left behind – a disadvantage of course to the creditor – but may be better to get something back than nothing at all.
Disadvantages of a pre-pack
- There can be a lot of upset creditors who feel left behind and also may not have been given the chance to buy the business or object to the sale.
- There will still be an investigation. If the directors are worried about this and their conduct, there is still a detailed investigation of what went wrong and a report will be filed with the Insolvency Service.
- All employee rights move across to the new company (TUPE). This may be too much of a burden for the business to take on as all employee rights can move across automatically including redundancy rights.
- Some view pre-packs as unethical and they can be high-risk work for insolvency practitioners. The insolvency practitioner who is acting as administrator knows he or she will face careful questioning from creditors and be under close scrutiny. A very detailed report has to be sent out to all creditors (called a SIP 16 report) within seven days.
- The directors (if they are buying the business) have to find the funds to buy the business. They also have to get new lines of credit and be able to fund the working capital and that may prove expensive.
- They can be expensive to deal with in fees.
If you would like more information on pre-pack administrations then contact our specialist team on 0800 331 7417 for advice