Pre Pack Administration is when an insolvent business is sold to a ‘phoenix’ company. A ‘phoenix’ company is a business that has been set up by the existing directors before going into administration. This means that the business can continue to operate with minimum interruption.
The sale of the business is completed by an Administrator so that a fair price is achieved for the insolvent business. The purpose of Pre Pack Administration is to save jobs and provide creditors with a better payout than through the process of ordinary liquidation.
Pre Pack Administration is a relatively new process, but it is becoming a popular process for insolvent businesses because it enables the business to continue trading whilst allowing insolvency to be resolved.
The process often goes unnoticed as the business is sold off before unsecured creditors and customers become aware of the situation, this is particularly the case if the business is in the retail environment.
The process of Pre Pack Administration
If a business decides to enter Pre Pack Administration, then the negotiations between potential purchasers takes place before the business has formally entered administration. This means that the businesses unsecured creditors don’t know what is happening and are unable to get involved.
To enter into the process an Insolvency Practitioner needs to be involved, and they will have responsibility to all creditors. They must keep detailed records of the process and they will need to prove that Pre Pack Administration was the right solution for each case. Although the existing Directors want to purchase the company, the insolvency practitioner needs to get a fair price for the business and they need to market the business, this may mean that another party could make a better offer.
Once the sale of the business has been agreed, the company then enters administration. The administrator’s then conduct the sale of the business, this normally happens very quickly. At all times the administrator needs to demonstrate that they have acted in the best interests of the creditors, and will be able to supply creditors with a detailed explanation of all the actions upon request.
The issues with Pre Pack Administration
Some people think that Pre Pack Administration allows Directors to close down their insolvent business and continue trading under a new name, therefore leaving their creditors with unpaid debts and not taking responsibility for what they owe.
This is incorrect, as since January 2009 new guidelines were issued to insolvency practitioners making clear that this process is only to be entered into if it is in the best interests of the creditors.
Choosing the right solution
If you are considering entering into Pre Pack Administration you should seek some professional advice to ensure that this solution is the best solution for you and your creditors.
To understand the whole range of options and to get help choosing the right one for your business contact us on 0800 597 4757 or enquire online using the form opposite.
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