For the unversed, pre-pack administration is a method that sells a struggling business on the day the company is being placed into administration. This process has been introduced to help a company preserve both its business and employees. The company purchasing the distressed business will help its customers seamlessly transition their business with the buyer and hopefully guarantee a healthier future. Pre-packing a company also means it will retain employees from the old company, which won’t put any further strain on the economy since employees won’t be claiming for notice pay, redundancy, holiday pay, and arrears of pay. Pre-packing also guarantees that assets won’t be sold for a lower forced or fire sale but will go for a higher “in-situ” value.
Administrations like this are not without its share of detractors. Some people are concerned that this process of acquiring a business’ assets might have the buyers ignoring the liabilities, such as HMRC, trade creditors, as well as pension liabilities. On the surface this might look to be the case. If the asset valuation isn’t accepted by the purchasing party, then marketing costs for extended time periods will be reduced significantly for creditors, which would then leave acceptance of the lower offer. This deal would seem to be questionable for creditors because in a lot of cases the ones buying the company are the same directors of the previous business. One way they safeguard this is by having insolvency practitioners needing to justify the purchase with SIP 16, a written notice to creditors of the company about the sale strategies he employed. It is important to note, though, that assets of a company are worth what a company or individual is willing to pay for. It then follows that in recession the price is lower than it was a year ago or so.
But are directors abusing this, you ask? Administrators, once they are appointed, are required to conduct investigations of the company and its directors. They can question transactions that could’ve been undervalued when sold, preferential payments, granting of a floating charge in the span of a year, or credit transactions they deem to be extortionate. Aside from that, the liquidator can conduct their own investigation too if it is seen that liquidation was used by a company to get out of administration. These investigations will be sent to the Department of Business Innovation and Skills and an offending director could be made to pay or be disqualified from his post for up to 15 years.
Criticisms aside, the government hasn’t made any move on changing pre-pack administration regulations because it is seen as a quick way to rescue a business and helps maximize creditors’ returns.