A pre-pack administration is where a sale of the business by the Administrator is effected immediately following his appointment as Administrator. Existing management are the most likely purchasers and the business is not marketed openly which gives rise to a level of suspicion from the creditors if they are not being paid in full. This is effectively closed marketing is limited at best. As such there are procedures in place (SIP 16 explained below) to give transparency to the sale and provide information to creditors.

The “pre-pack” works by a sale agreement being negotiated prior to the administration and then completed immediately after, with minimum disruption to the actual business.

A more open market sale could also be effected by marketing the business to known interested parties or competitors, which has a number of advantages in terms of “testing the market” but this is likely to be limited to enable a seamless transaction of the business. A pre-pack allows a rapid transfer of the underlying business out of administration. This maximises the amount recovered and generally preserves jobs as well as customer and supplier relationships.

In the right circumstances, the pre-pack is a very useful addition to the corporate recovery toolbox, together with debt/equity swaps, compromises with creditors and trading administrations. Wider disclosure of the circumstances under SIP 16 are required to give creditors transparency in respect of the transaction.

In a pre-pack scenario an independent professional valuation of the business and its assets must be undertaken to ensure that it is sold for value. This is completed prior to any Administration/Sale so as to provide protection to all parties as to the level of consideration being paid.

The four reasons for a pre-pack are generally:

  • A seamless transaction of the business is required to avoid the loss of brand, customers, employers e.g: marketing services business
  • The costs of marketing and trading are excessive in comparison to the Company assets involved
  • There are fundamental difficulties in trading in administration e.g: offering warranties; and
  • There are specific circumstances which mean that an open marketing process is not possible or it is difficult/impossible to transfer the business to any party other than a specific party (e.g: landlord is a connected party)
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