Struggling businesses often turn to pre pack administration when insolvency seems imminent because of its benefits compared to the alternatives. A Prepack can minimize the damages of insolvency and provide critical business debt help by allowing an insolvent business to continue its operations while under the process of administration. The company is also given protection from creditor legal action — such as forced liquidation — during this time.
What is Pre-Pack Administration?
Administration is the process by which an insolvent company may be restructured and sold to pay its debts while under the management of an administrator. In the face of looming insolvency, directors may make all the arrangements to sell their company to a buyer(s) — who are sometimes the directors themselves — before appointing an administrator. Upon being appointed, the administrator immediately sells the company according to the packaged agreement. The pre-negotiated sale of a company's assets by its directors before the company even declares insolvency is called a pre pack sale and is the essence of pre pack administration.
How does it work?
Companies that have not yet entered insolvency proceedings may agree to a pre-pack sale to avoid the fate of the company being left solely to the administrator. In this procedure, the directors agree to either buy the company or sell it under certain conditions to a buyer before involving the administrator. A pre pack sale happens very fast; often within days of the appointment of an administrator. This process is usually agreeable to administrators because it allows them to avoid the risks involved with marketing the company themselves such as the devaluation of the company's assets.
What are the advantages and who benefits?
Although it is a controversial topic, the truth is many people benefit from pre pack administration. First, directors sometimes benefit by being able to revive the insolvent company as its new owners. Some criticize the fact that prepacks allow the directors who ruined the company in the first place to be central to its future restructuring. This, however, is not always the case.
Secondly, employees benefit from the continuity of the business by suffering minimal disruption to their jobs during the administration process. The preservation of jobs also facilitates the survival of the business and adds to its value by discouraging longtime employees from leaving. Thirdly, the interests of secured creditors are served by the speed of the process.
Additionally, the administrator benefits from the ability to sell the company speedily and often for its greatest value. Finally, the most important benefit of the pre-pack administration process goes to the business itself. By flowing smoothly from insolvency to administration and restructuring, a business preserves its continuity and value.
What are its disadvantages and who is affected?
The major concerns regarding prepacks come from unsecured creditors. Because of the speed of the process, unsecured creditors may not even know until it a sale has occurred, much less be part of the decision making. This can lead unsecured creditors to distrust the sale and think they could have gotten a better deal had the company been on the market longer. Additionally, they may not be able to investigate issues regarding improper incurring of credit by directors of the insolvent company. The end result, they feel, favors the directors and secured creditors.
Is pre-pack administration synonymous with business debt help?
A prepack can help a businesses continue operating under new owners should it ever face insolvency. So, under the most extreme conditions, prepacks are a form of business debt help. Selling the company to new owners –whomever they might be- can save a business from crushing debt and give it the chance to restructure.
Prepacks are particularly effective to those who value the company for more than its cash worth in comparison to other insolvency procedures. A company that becomes insolvent may be forced to liquidate by its creditors or it may be entered into administration. In any case, the future of the company rests in the hands of the creditors whose prime concern is usually retrieving the money owed them, not the survival of the company. Pre pack administration is usually chosen over other insolvency procedures because it gives the company the opportunity to overcome debt and become successful again in the future.