Partner Article

Pre-pack administrations

With Watson Burton LLP Law Firm

A pre-pack administration involves a deal for the sale of a company’s business or assets before it enters into a formal insolvency process. This is sometimes done with little or no marketing and the buyers of the assets of a business are often the old management. Pre-pack administrations are seen as an attractive way of keeping those parts of a business that are commercially viable running, while avoiding taking on the liabilities of those parts of the business which are not.

The benefits of pre-pack administrations, aside from the obvious - being able to cherry-pick the most interesting assets - will depend on the nature of the business and assets. One thing pre-pack administrations have in common is that employees are frequently saved from potential redundancy as a result of the quick sale. Pre-pack administrations can also be viewed as a restructuring tool, albeit a rather extreme one, where businesses are pared to the essentials in order to be fit to survive the downturn in their business.

The downside of pre-pack administrations is that they appear contrary to the purpose of an administration. The administration process, which offers companies protection from winding-up petitions, due to the moratorium imposed, is also aimed at saving the business through sound financial management by professional administrators. This can often result in saving the company from liquidation or (more often) selling its business as a going concern.

Pre-pack administrations have been criticised - generally by creditors - as being an easy way for business owners to rid themselves of their liabilities and start again with a ‘clean slate’. Business owners respond by suggesting creditors should be more flexible when presented with ‘Company Voluntary Arrangements’, a pre-insolvency arrangement designed to give companies some breathing space, avoiding administration altogether.

However it should be noted that keeping a business going in administration while trying to find a suitable buyer may simply delay the inevitable. Administrators face often insurmountable problems trying to continue to trade in a business in administration, incurring attendant costs including professional fees and property holding costs. There is also no guarantee that the administrators will find a buyer for the business.

Therefore business owners should carefully consider all their options when considering a pre-pack, especially if their business is subject to seasonal or periodic cash flow. Other important considerations are: whether the business could be splintered effectively - and which parts the owners would like to keep; whether the sale of any major assets would affect the ability of the rest of the business to continue trading; and whether employees would be automatically transferred as a result of any sale of assets.

If you have any questions about this article or any employment matters, please contact Benjamin Hanley of Watson Burton LLP at benjamin.hanley@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .