If your business is insolvent and you are hoping to sell it, then you might be interested in a pre-pack administration. This process can help organisations as it facilitates the sale of a business which finds itself insolvent. All of the negotiations pertaining to business assets happen before an administrator is appointed, which means that afterwards, the sale of the business usually goes through quite easily.
The assets can be bought by a number of different people, such as trade buyers or third parties; however, you tend to find that they are frequently bought by the directors of the insolvent business who begin trading under a new name. There are a number of requirements that need to be met if a business wants to go down the pre-pack administration route, and one of the most significant is that doing so will be in the best interests of the creditors. Therefore, it is a convention that proof of the decision-making process is provided.
There are a number of advantages and disadvantages that come with getting a pre-pack administration, so if it is something you are considering doing, you should be sure to take all of these into account. You should also consider enlisting the help of professionals who will be able to explain the process in more detail, specifically how it would apply to your business.
Advantages of Pre-Pack Administration
Some of the main advantages that come with pre-pack administration include but are not limited to:
- Continuity of Business
When a business gets sold as a “going concern”, the business operations are going to continue unabated. As such, the overall value of “work in progress” remains protected, making it easier to keep working and harness relationships with existing customers. It means that once the business has been sold and the new business gets up and running, losses will be prevented, and the way things operate is not going to be affected adversely.
- Able to Maintain Brand Image
When businesses opt for other forms of insolvency practice, you tend to find that it has an effect on the way that the public perceives a business. Public perception is incredibly important, and therefore, it is crucial you keep your reputation as positive as possible. If you’re able to do this and maintain the brand’s image using a pre-pack administration, then jobs could be saved, cash flow maintained, and the new company is going to be given a better chance of being successful once the sale is complete. All of these different aspects will steadily contribute towards an organisation’s long-term success, and therefore, they are very important.
- The Directors Can Keep a Degree of Control
During this period of administration, the directors are able to maintain some degree of control over everything, which you don’t get with other procedures surrounding insolvency. Chances of success are increased when the business is sold to people that directors already know and, as such, have knowledge of how different procedures and processes work. Directors will also have knowledge of the different areas where the business has failed and, as such, can act on these to massively benefit the new business.
Disadvantages of Pre-Pack Administration
Some of the main disadvantages that come with pre-pack administration include the following:
- The Conduct of Directors Will Be Investigated
Once the assets of the business have been sold, it’s more than likely the old company is going to be liquidated. During this process, the liquidator is going to need to compile a report for the Department for Business that discusses the company directors’ conduct leading up to the organisation’s eventual insolvency. Even if the directors of a business have formed a new company, then they are going to still be open to investigation. Depending on the outcome of this report, it could be the case that HMRC disallows VAT registration if misconduct has been uncovered.
- The Process Can Be Viewed as Unethical
You tend to find that a lot of people view pre-pack administration as unethical. This is because debts are written off. Because of the negative stigma that some people attach to pre-pack administration, the benefits outlined above can often be somewhat reversed; for instance, customers might lose goodwill if they hear about it. There is also the risk that following pre-pack administration, businesses might be unable to obtain credit from suppliers, and there could be a subsequent loss of trade.
- It Can Cost a Lot
When you are entering into pre-pack administration with the interests of directors buying the assets and trading under another name, directors are going to need to amass a fair amount of money in order to purchase said assets. All of the business’s assets cannot be undervalued, and they need to be assessed and sold at a fair market value in the interests of creditors. As such, there can be a significant financial undertaking for directors who would like to go down the route of a pre-pack administration, and they are going to need to be aware of this before entering into it.
Is a Pre-Pack Administration Right for You?
A lot of businesses like to use pre-pack administration when their business goes insolvent. This is the process surrounding the quick sale of a business because the assets of the said business are negotiated and purchased before an administrator is appointed. There are a number of advantages to this process; for instance, the directors maintain control over the business and, as such, are able to try and maintain the brand’s image. On the other hand, there are also disadvantages to adopting this process as a lot of people view it as unethical, the director’s conduct is going to be investigated, and it can be quite costly.
Due to the above, if your organisation is insolvent and you are considering pre-pack administration, this is something you need to think long and hard about. If you need help with your decision, then be sure to reach out to Leading UK. Here at Leading UK, our team of experts will be able to look at your business’s current position and provide you with the best advice on how to move forward. For any more information or if you have any questions, do not hesitate to get in touch.
