So what does Pre-Pack Administration mean? As soon as an administrator is appointed the company is sold to a new company. If the directors of the newly formed company are exactly the same as the previous company then to prevent any abuse to the company additional scrutiny is required.
It is vital a company takes advice so that is can continue to trade without disruption. If a company that was struggling decided to carry out trading while in administration many issues could arise such as key stakeholders such as employees, suppliers and customers may not stay loyal to the company.
Administration is a lengthy process and means appointing an insolvency practitioner who will take control of the company and administer interests with creditors such as dealing with outstanding payments.
There are a number of ways of tackling administration and pre-pack is just one example. Other solutions include restructuring the company, taking out a Company Voluntary Arrangement (CVA), and sell assets before the liquidation.
Pre-pack Administration will sell assets immediately as soon as an administrator is appointed. It is important to note they will not then trade the company.
The old company (pre administration) keeps all liabilities and these don't just include outstanding payments to creditors but also lease agreements in place. Employment contracts can also be terminated. It is best to take specialist advice regarding employment because employees are protected.
There are massive advantages of Pre-Packs. These include allowing the new company (post administration) to continue to trade without carrying any of the debt from the old company and maintain stakeholder relationships.
It is highly advised though before using this method that consultation is made with the insolvency practitioner. They will also check to make sure that the assets are not sold less than their net book value (NBV) or in simple terms their worth. They will be valued independently.
There can be an issue when funding pre-packs as there is a need to have start-up capital. This may be difficult to obtain especially as these previous company went into administration because of financial difficulties.
When trying to buy a new business funding can most often be obtained from the bank. It is worth noting funding will include buying the business plus working capital so that the business can start running. Working capital include inventory. Remember that creditors from the old company will very likely be wary of supplying credit since the old company has gone into liquidation and may still have outstanding debts.
A new company may have to source credit from elsewhere or find up front.
HMRC can be another barrier. HM Revenue and Customs (HMRC) can ask the new company for a deposit to cover PAYE payments and any potential VAT liabilities. HMRC can potentially ask for six months in advance. This is especially the case if directors are identical for both companies.
In regards to creditors a pre-pack can be beneficial to them. A quick sale of assets at the right value can mean a good return to creditors who would otherwise potentially be faced with getting no repayment for their invoices.
A business that is struggling and put into administration without the use of pre-pack can cause a dramatic increase in the value of the business, mainly due to disruption and loss income.
Pre-Pack Administration is a good choice to preserve relationships and goodwill without all the start up costs that are usually associated with a new business venture.