Pre-Pack Administration

We review your financial situation and explore whether pre-pack administration is the right solution for your business.

We carry out a formal valuation of your business’s assets and operations.

We handle the sale of viable assets to a new company, ensuring compliance with insolvency regulations.

The new company takes ownership of the assets, allowing the business to continue trading.

We ensure the entire process is conducted transparently and in full compliance with UK law.

A Pre-pack Administration is a company administration process that involves selling a business or its assets immediately following the Administrator’s appointment, without any trading of the Company by the Administrator.   . A particular feature of a Pre-pack Administration is that an Accelerated Merger and Acquisition (“AMA”) process is undertaken prior to the appointment of the Administrator. This usually results in the business being sold 

A Pre-Pack Administration must also meet one of the objectives required of an Administration, which are as follows:

• To rescue the business as going a concern
• To provide a better result to creditors than if the company entered into liquidation or
• To enable a distribution to the secured and / or preferential creditors of the company.

An AMA process is a period of marketing that is undertaken in time limited circumstances. For example, if the company faces significant creditor pressure, it will not be able to enjoy a long marketing period as recovery action could be commenced before a sale could be concluded. 

In an AMA the Administrator will look to achieve the maximum level of broadcast to potential purchasers in the time available. This is usually undertaken by a mixture of targeted marketing to known interested parties, advertising the company on a variety of marketing portals (such as www.ip-bid.com) and also through the engagement of specialist agents with experience in AMA marketing. Between the Administrator, the marketing agent and the marketing portals, it is normal for an AMA opportunity to be put in front of thousands of prospective purchasers.

Once the initial marketing flyer has been circulated, interested parties will be required to sign a Non -Disclosure Agreement in order to gain access to a data room containing detailed information regarding the company and its assets. 

A deadline is set for offers, and the nominated Administrator together with their advisors will then consider the offers and establish the best offer. Marketing may be extended, or a further deadline for offers may be set if there is significant interest and offers of competing values, in an attempt to obtain the best offer for the company. 

The AMA must be conducted in line with the Statement of Insolvency Practice 16, a set of guidelines that required an Administrator to provide creditors with information about pre-packaged sales. . 

A connected party, such as a director, shareholder or sister company, may bid for the company’s assets. An Administrator will consider all offers equally and identify the best offer.  On 30 April 2021 the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 came into force. The Regulations place further requirements that must be met if a sale to a connected party is to be undertaken. 

From 30 April 2021 the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 take effect where the Purchaser is a party connected to the company. Examples of connected parties are shareholders, directors, family members of shareholders and directors, and companies under the control of the foregoing. 

Where such a sale is proposed the Administrator cannot conclude the sale within 8 weeks of the commencement of the Administration (assuming that all or a substantial part of the company’s business is being bought) without meeting further requirements. 

The two primary requirements are that the Administrator obtains the agreement of creditors to the sale, which in practice would take at a minimum of 17 days to convene a decision procedure, or that the proposed purchaser obtains a report from an independent Evaluator.

An Evaluator may be any professional that considers they have suitable experience to review and adjudicate on the appropriateness of a sale of a company entering into Administration. In addition, they must also hold appropriate professional indemnity insurance. 

As this is a new role, currently a number of Evaluators are entering the market predominantly with insolvency backgrounds. For example,he The Pre-Pack Pool, which previously provided voluntary reviews of connected party Administrations, now serves as an Evaluator and continues to provide reviews.

Whilst the Evaluator is instructed by the proposed purchaser of the company’s assets, the Administrator must satisfy themselves that the Evaluator’s report is of sufficient quality to meet the stated requirements. 

The Evaluator’s responsibility is to provide a report providing their view on the reasonableness of the disposal along with the reasons for arriving at their opinion.

The Administrator must consider the report, but they are not obliged to follow it. In particular, if the Administrator remains of the opinion that the connected party sale represented the best return for creditors, and the Evaluator does not agree, the Administrator may proceed with the sale. 

Should the connected party’s offer change substantially as a result of the Evaluator’s report, a further report will be required. 

Ultimately the Evaluator will require whatever information they may require to form an opinion on the appropriateness of the proposed purchase of the company’s assets.

It is likely they will need to know the following information about the insolvent company: 

• name of company
• company number
• nature of business
• details of assets and liabilities
• list of creditors, whether they hold security and amounts owed
• personal guarantees given for debts, funding and guarantee limits
• details of any charges registered against the company
• number of staff
• asset or business valuations (or both)
• summary of events leading up to the current situation
• steps taken to avoid administration

They will also likely need to know the following about the purchaser:

• name of purchaser
• purchaser’s company number (where applicable)
• names of directors (where applicable)
• names of directors’ other interests (where applicable)
• list of all connected persons involved in the proposed disposal
• nature of connection or connections to the company
• details of involvement in any previous companies that entered formal insolvency for all connected persons involved in the proposed disposal
• what will be different going forward
• personal guarantees given for debts, funding and guarantee limits

They will also likely need to know the following about the proposed sale:

• details of the offer made and why the offer has been made at that value
• who (if anyone) is disadvantaged or favoured by the transaction(s)
• copies of any previous reports obtained

In addition, some or all of the following supporting evidence may be required:

• viability study or statement
• summary financial accounts including balance sheet
• statement of affairs
• business statement
• business plans
• business forecasts
• documentary evidence

If the directors of a company are concerned that it is in financial distress, they should approach an Insolvency Practitioner in the first instance to seek advice. The Insolvency Practitioners will provide a free consultation to assess the  company’s affairs and advise on the options available. If a Pre-pack Administration is suitable for the company, the Insolvency Practitioner will present it as an option to pursue. 

The next step would be for the company to instruct the Insolvency Practitioner to assist in placing the company into administration. The Insolvency Practitioner would work with the company to ensure all steps are taken to successfully enter into administration and in particular will oversee and manage the AMA process.

The following steps are taken in the pre-pack administration process:

• First appointment with Insolvency Practitioner to understand the issues facing the company and the options available
• Agreeing that a pre-pack administration is appropriate
• At this stage ethical and money laundering checks will be undertaken, if not already concluded
• The company will formalise the engagement of the Insolvency Practitioner
• The Insolvency Practitioner will obtain, if not already received, all information required to market the company and arrange for suitable agents to assist in marketing
• A timeline will be agreed for marketing, after consideration of the pressures facing the company
• The marketing will then commence
• In parallel to this the Insolvency Practitioner will liaise with the company and key internal and external stakeholders (such as banks) to ensure that all parties are communicated with in the right way and at the right time to minimise risks to the company. This may involve filing a Notice of Intention to Appoint an Administrator. 
• The marketing period will then conclude and offers will be considered. the marketing period may extended if there is significant interest and it may benefit the company’s creditors to further test the market
• Once an offer has been accepted in principle, the purchaser and the Insolvency Practitioner will prepare sale contracts
• If a connected party sale is proposed, the connected party purchaser will at this stage engage an Evaluator to provide a report on the sale
• Once the sale document are agreed and the Evaluator’s report is received the Insolvency Practitioner will look to complete the sale as soon as they are satisfied the offer is the best for the company and its creditors
• The company will then formally enter into administration. Depending on the circumstances this may be done in or out of Court. 
• Immediately following their appointment the Insolvency Practitioner, now Administrator of the company, will conclude the sale of the company. 
• Thereafter the Insolvency Practitioner will deal with any residual assets and then undertake the necessary administrative work and reporting to creditors to bring the company’s affairs to a close.

A Notice of Intention to Appoint an Administrator (“NOIAA”) is a document that is filed at court and must be served on the company and any qualifying floating charge holders – usually the company’s bank or finance providers. 

The NOIAA provides an interim moratorium which prevents any party from pursuing further legal action, including the uplift of assets and similar, without the consent of the Court. The NOIAA lasts for a period of ten business days, at which point it automatically expires. A further NOIAA may be filed if required, however this should be carefully considered and should serve a specific purpose, such as enabling the completion of sale agreements. 

An NOIAA also provides the company’s qualifying floating charge holders with a five day window to consider if they wish to appoint their own Administrator. It is therefore important to consult with any qualifying floating charge holders in advance of the filing of a NOIAA.

An NOIAA should only be filed when the directors have a real intent to place the company into Administration.

A pre-pack administration allows for the seamless transition of the insolvent company to a purchaser immediately following the Administrator’s appointment. The following are examples of the benefits this can bring: 

• Employees retained by the purchaser will seamlessly move to the new company and therefore will not have any interruption in their role. This serves to mitigate their claims against the company, if they were to be made redundant. It also ensures that they are available to continue to service clients. By providing continued seamless service to clients, it is likely that client confidence will be protected as best it can, and therefore the purchaser will have the highest chance of retaining their business going forward.
• As disruption is minimised, this will also serve to minimise belligerent complaints arising from the company’s debtor ledger. It is normal for debtors to contest or avoid making payments to insolvent companies and is usually a time consuming and potentially expensive process for the Administrator to pursue recoveries of these debts which are due to the insolvent company. As a result mitigating these belligerent complaints can enhance the quantum and speed of debtor ledger recoveries for creditors. 
• Whilst an Administrator could undertake an AMA process following their appointment, it is likely they would need to trade the company to preserve its value whilst the AMA process was completed. It is often not possible for a company to trade in administration as it has insufficient funds to fund the trading expenses (such as wages, rent and essential supplies). Where there are insufficient funds, it can be the case that the period of trading is loss making and the costs of trade would need to be settled from asset realisations. A pre-pack administration avoids these issues. 
• In some sectors, it may be impossible to undertake a period of trading whilst in administration and a pre-pack administration will allow a sale of the company’s business and assets to be concluded, where it would otherwise be unavailable. 
• As a highly regulated process, particularly where a sale is to be concluded to a connected party, if all legislative requirements have been met then the Administrator, directors and creditors can be confident that best value has been achieved for creditors in the company’s circumstances. 

The above are a sample of the reasons to proceed with a pre-pack administration. It is likely that the Insolvency Practitioner advising the company over the options available to it will set out both the general and company specific advantages to a pre-pack administration. 

While a pre-pack administration can result in the best outcome for both the business and the creditors, it is heavily regulated. The process must be conducted in a manner compliant with the regulations as set out in Statement of Insolvency Practice (“SIP”) 16. 

In addition, with effect from 30 April 2021, should a pre-pack sale be made to a party connected to the Company, the Administrator is obliged to receive a viability statement prepared by an Evaluator (obtained by the Purchaser at their expense), and provide the viability statement to the Company’s creditors and arrange for a copy to be filed at Companies House. Alternatively, the Administrator will be obliged to seek the agreement of creditors to conduct the sale by way of a decision procedure or conduct the sale 8 weeks after appointment.

The provisions summarised in the preceding paragraph do not apply to a sale to an unconnected party.

As a result, the main disadvantages to a pre-pack administration are that it is a highly regulated and contentious rescue process. This has the practical impact of increasing the level of reporting and legislative burden on the proposed Administrator, which ultimately leads to an increase in their costs, particularly prior to their appointment. 

Whilst a pre-pack process can be the best solution, it carries a stigma and receives a hostile reaction due to historic abuses of the pre-pack process and the perception, particularly where the sale is to a connected party, that the directors / shareholders have effectively dumped the creditors and carried on without consequence.

A pre-pack deal is a sale of the assets of an insolvent company immediately or shortly following the appointment of Administrators. An AMA process will be undertaken prior to the commencement of the Administration, to identify interested parties. 

The main features are as follows:

• Transparency in all dealings of primary importance;
• Creditors and other interested parties should be confident that the Insolvency Practitioner has acted professionally and with objectivity;
• An Insolvency Practitioner should differentiate clearly the roles that are associated with an Administration that involves a pre-packaged sale (that is, the provision of advice to the company before any formal appointment and the functions and responsibilities of the Administrator). The roles are to be explained to the directors and the creditors;
• Creditors should be provided with a detailed explanation and justification of why a pre-packaged sale was undertaken to demonstrate that the Administrator has acted with due regard for their interests;
• An Administrator should provide creditors with a detailed narrative explanation and justification of why a pre-packaged sale was undertaken to demonstrate that the Administrator has acted with due regard for their interests. The Administrator should include a statement explaining the statutory purpose pursued and confirming that the transaction enables the statutory purpose to be achieved and that the sale price achieved was the best reasonably obtainable in all the circumstances;
• The information disclosure requirements should be included in the explanation unless there are exceptional circumstances;
• The explanation should be provided with the first notification to creditors and in any event within seven calendar days of the transaction; and
• When a pre-packaged sale has been undertaken, the Administrator should seek the requisite approval of his proposals as soon as practicable after appointment.

The disclosure requirements within a Pre-pack administration are as follows:

• The source of the initial introduction to the Insolvency Practitioner (to be named) and the date;
• The Administrator’s involvement prior to appointment;
• Alternative courses of action considered and possible financial outcomes;
• Whether efforts were made to consult with major creditors and the outcome of any consultations;
• Why it was not appropriate to trade the business and offer it for sale as a going concern during the administration;
• Details of requests made to potential funders to fund working capital requirements;
• Details of registered charges with dates of creation;
• If the business has been acquired from an Insolvency Practitioner within the previous 24 months;
• Details of that transaction and whether the Administrator;
• Confirmation as to whether the Administrator’s firm or associates were involved;
• Marketing of the business and assets;
• Any marketing activities conducted by the company and/or the Administrator and the outcome of those activities;
• Valuation of the business and assets;
• The names and professional qualifications of the valuers/advisors and confirmation that they have confirmed their independence;
• The valuations obtained of the business or the underlying assets;
• A summary of the basis of valuation adopted by the Administrator or his valuers/advisors;
• The rationale for the basis of the valuations obtained and an explanation of the sale of the assets compared to those valuations;
• The date of the transaction;
• Purchaser identity and any connection with the directors, shareholders or secured creditors or associates;
• Names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred;
• In transactions impacting on more than one related company (e.g. a group transaction) the Administrator should ensure that the disclosure is sufficient to enable a transparent explanation (for instance, allocation of consideration paid);
• Whether any directors had given guarantees for amounts due from the company to a prior financier and whether that financier is financing the new business;
• Details of the assets involved and the nature of the transaction;
• The consideration for the transaction, terms of payment and any condition of the contract that could materially affect the consideration;
• Sale consideration by asset valuation categories split between fixed and floating charge realisations; and
• Any options, buy-back agreements, deferred consideration or other conditions attached to the contract of sale; and
• if the sale is part of a wider transaction, a description of the other aspects of the transaction.

The cost of a pre-pack administration will ultimately be dependent on the size of the company and the nature of its business. The costs of a pre-pack administration relating to the pre-appointment period will be higher than in a normal administration as the nominated Administrator will be overseeing the AMA process and preparing the company for a sale. 

Normally the costs of a pre-pack administration following the appointment of Administrators will be broadly the same as an Administration without a pre-pack administration, as in both cases the Administrators have the same duties to discharge. One notable exception is where the company is traded by an Administrator following their appointment, where additional costs would be incurred in trading the business. 

Factors which would affect the pre-appointment costs of the pre-pack administration are as follows:

• The size of the company’s assets. If the company has assets across locations nationwide, it is inevitable that more time will be incurred valuing them than assets located at one site. The literal size of the assets can also be a factor, as substantial equipment built into the fabric of the trading premises will require careful consideration to ensure further claims, such as dilapidation claims, do not arise. 
• The complexity of the sale proposed in respect of the company’s assets. A solicitor will draw up a sale agreement with all the necessary terms and provisions. However, it is often the case that pre-pack sales can involve performance related pay, or can be paid on deferred terms and therefore appropriate protections will need to be in the contract to protect the company’s creditors should the purchaser fail to perform. Whereas the proposed Administrator’s solicitors will be looking to protect the company and the Administrator’s interests, the purchaser, particularly in complex sales, will likely have their own solicitors reviewing the contract to minimise the burden on the purchaser. As a result the more complex the sale, the more legal fees are likely to be incurred. 
• The research required into the company’s affairs. Whilst many companies have a lot of similarities, companies operating in specific sectors may be subject to sector specific legislation or requirements that will need to be dealt with. An example of this is in the transport sector, where the purchaser must have a valid licence in order to trade the company post sale. More time may be expended by the Administrator in reviewing these sector specific requirements to ensure they are aware of current legislation. 
• The number of interested parties. If the AMA results in a significant number of prospective purchasers, further marketing may be appropriate to secure best and final offers. Often a bidding war is the best way to maximise returns for company’s creditors and it is therefore in their interest for further time to be incurred.

The above are a sample of the factors that may impact on costs and are not exhaustive. An Insolvency Practitioner should be able to provide an estimate as to the costs that would be incurred early in the process, and would normally estimate their fees as part of the terms of their engagement. Whilst a contribution to costs may be required from the company’s fund to undertake the work, it is important to note that often that the costs of an administration are usually settled from the sale proceeds, subject to the approval of the company’s creditors. 

Initially an Administration lasts for a fixed period of 12 months. An Administrator may seek to extend the Administration by a period of a further 12 months with the consent of the appropriate body of the company’s creditors. This may be necessary, for example, when the company has assets still to be realised. 

Thereafter, the Administrator must apply to Court for any further extensions and must satisfy the Court that further extensions are in the interest of creditors. 

An Administration can end sooner than 12 months if all work is completed, or if the company is to move into a different insolvency process, such as a Company Voluntary Arrangement, or Creditors or Compulsory Liquidation. 

The length of the Administration is ultimately dependent on the circumstances of the individual company.

A company can exit administration as part of the administration process. The company may negotiate a deal with its creditors – a company voluntary arrangement (“CVA”) – which formalises this arrangement. It is also possible for a company to exit an administration if all creditors are paid in full. 

Where a CVA is not proposed, it is most likely that the company will ultimately be dissolved or enter into liquidation following an administration, as any purchasers will have likely bought the company’s business and assets, but will not want to adopt the company’s creditors or onerous contracts.

Administrators are usually paid in one of two ways. Normally, an Administrator is paid for their work from the funds received from the sale of assets within the Company’s Administration. Administrators will seek creditor approval for both their pre-appointment and post-appointment time, usually on either a time costs or fixed fee basis. 

Once creditors have approved the proposed fees, the Administrator will invoice the company and draw their fees from the funds available from time to time as and when they consider it appropriate. 

In certain circumstances, it may be necessary for the Administrator to agree a fee with the company prior to administration which the Administrator would look to the company to settle, although third parties, such as directors, can make payment if required. If such a payment was required this would be dealt with at the point the company formally engaged the Insolvency Practitioner.