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.
Many creditors are unhappy about the use of Pre Pack Administrations because they have very little involvement in making sure they get the best possible settlement from any deal. The fact that the creditors will be the ones to lose money, as the company simply wipes out its debts and carries on trading under different management, means Pre Pack Administrations are not popular with everyone. Whatever sale is agreed during the Pre Pack Administration will decide what creditors receive, and they simply have to accept this.
Those in favour of Pre Pack Administrations would argue that the involvement of Insolvency Practitioners in the process ensures that this is a legitimate way of achieving the best possible outcome for all parties. Not having to go through the the formal insolvency process means creditors receive as much of what they are owed as can be repaid, and the business can keep trading so as few people as possible lose their jobs.
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.