Pre-Pack Administration: A Guide for Company Directors

A pre-pack sale may be considered where delaying a sale could destroy value.

For example, an insolvent company may still have:

• valuable customer contracts;
• a strong trading name;
• skilled employees;
• intellectual property;
• stock;
• goodwill;
• viable parts of the business; or
• a potential buyer ready to proceed.

If customers, suppliers or employees become aware that the business is about to fail, value can disappear very quickly.

A pre-pack sale allows the business to be transferred before that deterioration occurs.

Government guidance recognises that the speed of a pre-pack sale can help preserve business value, jobs and continuity.

The exact process depends on the company’s circumstances, but it will typically involve several stages.

1. The Company Is Assessed

A licensed insolvency practitioner reviews the company’s financial position and considers whether administration is appropriate.

They will look at:

• assets;
• liabilities;
• cash flow;
• creditor pressure;
• employee obligations;
• secured lending;
• HMRC arrears;
• trading performance; and
• whether the underlying business remains viable.

Administration must still serve a proper statutory purpose. It cannot be used simply to allow directors to walk away from company debts.

2. The Business Is Valued

Independent valuations will usually be obtained for the business and its assets.

The proposed administrator needs to be satisfied that the transaction is likely to produce an appropriate outcome for creditors.

3. Potential Buyers Are Considered

The business may be marketed to potential purchasers.

Possible buyers can include:

• competitors;
• investors;
• management teams;
• existing shareholders; or
• a new company formed by the existing directors.

The administrator must consider whether the proposed transaction represents the best available outcome in the circumstances.

4. The Sale Is Negotiated

The terms of the transaction are negotiated before administration.

This may cover:

• purchase price;
• assets being transferred;
• employees;
• intellectual property;
• stock;
• contracts;
• premises;
• goodwill; and
• payment terms.

5. The Company Enters Administration

An administrator is formally appointed.

At this point, control of the insolvent company passes to the administrator.

For a broader explanation of the procedure, see our Company Administration guide.

6. The Sale Completes

The pre-arranged sale can then complete, often immediately after the administrator’s appointment.

The buyer continues operating the acquired business while the administrator deals with the affairs of the insolvent company.

A connected person can include someone with a close legal or business connection to the company.

Examples can include:

• existing directors;
• company officers;
• certain family members of directors;
• business partners;
• companies controlled by connected individuals; and
• people or companies with sufficient control over the insolvent company.

Whether someone is legally connected depends on the specific circumstances.

The insolvency practitioner is responsible for determining whether the proposed purchaser falls within the relevant definition.

This is one of the most important rules directors need to understand.

Under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, an administrator generally cannot make a substantial disposal of company assets to a connected person within the first 8 weeks of administration unless:

• creditors approve the transaction; or
• the connected purchaser obtains a qualifying report from an independent evaluator and the administrator considers that report.

A substantial disposal can include the sale of all or a substantial part of the company’s business or assets.

SIP 16 is a professional standard applying to insolvency practitioners involved in pre-pack sales.

Its purpose is to ensure creditors receive sufficient information to understand:

• the circumstances surrounding the sale;
• why a pre-pack was considered appropriate; and
• why the administrator believed the transaction represented the appropriate course of action.

This helps improve transparency for creditors who may otherwise only learn about the transaction after it has completed.

Potential advantages include:

• continuity of the underlying business;
• reduced disruption;
• preservation of jobs;
• protection of goodwill;
• preservation of customer contracts;
• a faster sale process;
• reduced trading costs in administration;
• potentially higher asset values; and
• a potentially better outcome for creditors than an immediate break-up sale.

Speed is often the main advantage.

The longer a distressed business remains uncertain, the greater the risk that customers, staff and suppliers disappear.

Pre-pack administration also has potential drawbacks.

These can include:

• significant professional costs;
• directors losing control of the old company;
• scrutiny of director conduct;
• possible creditor criticism;
• reputational concerns;
• difficulty obtaining supplier credit after the sale;
• financing requirements for the purchaser;
• additional scrutiny for connected-party transactions; and
• no guarantee that the proposed sale will be approved or completed.

It should therefore only be used where the transaction genuinely offers a suitable insolvency outcome.

It may be worth considering where:

• the company is insolvent or facing imminent insolvency;
• the underlying business remains viable;
• creditor pressure threatens to destroy business value;
• a buyer is available;
• jobs or contracts could be preserved;
• a rapid sale is necessary; and
• administration is likely to achieve a better outcome than immediate liquidation.

It is generally less suitable where the business itself is no longer viable or there is little value to preserve.