What Is A Pre-Pack Administration and Why Do You Need One Now?
A pre-pack administration is a formal insolvency procedure which allows company directors to transfer protected assets to another company should your business become insolvent. However, companies do not benefit from the privileges of the pre-pack after a winding up order has been issued so you should sign up for one at the first indication of trouble if not before.
The administration pre-packs are a powerful solution for businesses to continue trading if the current business runs into financial difficulties. The main benefit is the company and its assets are protected by the court, which allows the administrator to easily dispose of debts, unwanted contracts and in some circumstances, employees (except where there is a TUPE).
The pre-packs therefore allow for the continuity of a business without losing assets such as equipment, inventory or property and in most cases allow you to retain clients, contracts you want to keep and employees you value. The company’s directors can basically buy all the assets they want and transfer them to another company without ceasing operations.
However, there are provisions:
The business must be insolvent
Although you need to sign for a pre-pack administration before a winding-up order is issued to the courts by creditors, you can only enforce the provision of the pre-pack once the business is made insolvent.
A business in the UK is deemed to be legally insolvent when its combined debts exceed the value of its assets, or if you have defaulted on payments amounting to more than £750 and failed to meet a statutory payment demand. In this scenario, a creditor can apply to the court to make you bankrupt.
Company directors must have funds to buy assets
To benefit from a pre-pack administration, the company directors, or the insolvency practitioners, must be able to purchase the company assets at reasonable market rates using their private funds. This essentially protects creditors and is what makes the pre-packs ethical.
The process is essentially the same principles as if a third party purchased assets from a business in order to cover debts. However, under normal circumstances, your assets would be confiscated by a bailiff to sell on or the company owners have to go through a time-consuming process of finding buyers to purchase assets.
The advantage of the pre-pack administration is that it cuts out the middle-man and entitles you to keep the company assets so there is no disruption to business operations whereby you lose even more profits.
No other solution
Company director’s still have a liability to pay creditors and although pre-pack administration offers benefits to the insolvent company, the law has a responsibility to act in the best interest of creditors. Therefore, practitioners handling the winding up of an insolvent company must show that a pre-pack administration is the best solution for creditors, and not just the company’s directors.
It is for the reasons mentioned above that insolvency practitioners are subject to strict codes of practice. Gordon Ferguson has vast experience of helping companies experiencing financial difficulties with pre-pack administration so contact us today for some friendly advice and assistance.