HOW A PRE-PACK SALE WORKS — AND WHEN IT MAY HELP PRESERVE A BUSINESS
When a company is facing serious financial difficulty, time can become one of its biggest challenges.
Customers may lose confidence, employees may begin looking elsewhere, suppliers can tighten their terms and the value of the business can deteriorate quickly. In some circumstances, pre-pack administration can provide a way of preserving all or part of an underlying business before that value is lost.
A pre-pack involves arranging the sale of a company's business and/or assets before the company formally enters administration, with the transaction completed by the administrator immediately or shortly after their appointment. It can allow a viable business to continue trading under new ownership, potentially preserving jobs, customer relationships and the value built up within the business.
However, pre-packs are formal insolvency transactions. They are subject to rules designed to protect creditors and provide transparency — particularly where the purchaser is connected to the insolvent company.
So, how does a pre-pack work?
WHAT IS A PRE-PACK ADMINISTRATION?
A pre-pack administration is a form of business sale carried out through the administration process.
Before the company formally enters administration, a proposed sale of some or all of its business and assets is negotiated and prepared. Once a licensed insolvency practitioner is formally appointed as administrator, the sale can then be completed immediately or shortly afterwards.
The important distinction is that the business and the company are not necessarily the same thing.
The insolvent company enters administration, while its underlying business or assets may be purchased and continue operating through another company.
Administration itself is a formal insolvency procedure governed primarily by the Insolvency Act 1986. Once appointed, the administrator takes control of the company's affairs, business and property.
The statutory objectives of administration are, in order, to:
rescue the company as a going concern where reasonably practicable;
achieve a better result for creditors as a whole than would be likely in a liquidation; or
where the other objectives are not reasonably practicable, realise property to make a distribution to secured or preferential creditors.
A pre-pack sale may therefore be considered where selling the business quickly is expected to preserve more value than allowing it to deteriorate or moving directly towards liquidation.
The UK Government provides further information on how administration works in its guidance on putting a company into administration.
WHY WOULD A BUSINESS USE A PRE-PACK?
Speed is one of the main reasons.
A distressed business can lose value remarkably quickly. News of financial problems can affect suppliers, customers, employees and potential purchasers, while an interruption to trading can damage goodwill and future revenue.
Because much of the preparation for a pre-pack takes place before the administrator's formal appointment, a sale can potentially be completed with minimal interruption to the underlying business.
Depending on the circumstances, this can help:
preserve the value and goodwill of the business;
maintain continuity for customers;
protect some or all employment;
preserve contracts and commercial relationships where they can transfer; and
achieve a better outcome for creditors than might otherwise be available.
However, a pre-pack is not automatically the best option simply because it is quicker.
An administrator has duties towards creditors and must be satisfied that the strategy adopted is consistent with the statutory purpose of administration.
That means the proposed transaction, valuation of the assets, marketing undertaken and alternatives available all need to be properly considered.
CAN THE EXISTING DIRECTORS BUY THE BUSINESS BACK?
Potentially, yes — but there are important safeguards.
A pre-pack sale can sometimes involve the existing directors, shareholders or another party connected with the insolvent company purchasing the business and assets through a new company. This is sometimes referred to informally as a “newco” arrangement.
However, connected-party sales have historically attracted scrutiny because creditors may understandably question how a business can continue under similar ownership while debts remain with the insolvent company.
For this reason, additional legal restrictions apply.
Under The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, an administrator cannot make a substantial disposal of the company's business or assets to a connected person within the first eight weeks of administration unless:
creditors have approved the transaction; or
the connected person has obtained an independent evaluator's report, which the administrator must receive and consider.
These rules apply in England, Wales and Scotland. Importantly, obtaining an evaluator's report does not itself mean that a transaction must proceed. The administrator remains responsible for deciding whether the sale is appropriate.
Further information on these requirements can be found in the Insolvency Service's guidance on independent scrutiny of disposals in administration, including pre-pack sales.
WHAT HAPPENS TO THE COMPANY'S DEBTS?
A pre-pack sale generally involves the business and/or assets being sold rather than the purchaser simply taking ownership of the insolvent company itself.
The proceeds from the sale are paid into the administration and dealt with in accordance with insolvency law and the applicable order of priority.
The liabilities of the insolvent company do not simply disappear, and the purchaser does not necessarily assume all of them. Exactly what transfers will depend on the transaction and the applicable law.
Employee rights are an especially important consideration.
Where a business or undertaking transfers to another employer, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply. Insolvency can make the position more complex, so the treatment of employees should be considered carefully as part of any proposed transaction.
Directors should also remember that administration does not remove the usual scrutiny associated with a company's insolvency. Their conduct may be reviewed as part of the insolvency process, and existing personal guarantees or other personal liabilities are not automatically cancelled simply because a pre-pack sale has taken place.
IS A PRE-PACK RIGHT FOR EVERY STRUGGLING BUSINESS?
No.
A pre-pack is one option within the wider UK restructuring and insolvency framework, and it will only be suitable in certain circumstances.
Much depends on whether there is an underlying business worth preserving, whether a sale is achievable and whether administration is capable of producing an appropriate outcome under its statutory objectives.
For some companies, another solution may be more appropriate. Depending on the financial position, this could include restructuring, refinancing, a Company Voluntary Arrangement (CVA), a conventional administration and business sale, or Creditors' Voluntary Liquidation (CVL).
Understanding the options available before taking action is therefore important. VOSCAP provides support across business rescue and recovery, turnaround management and corporate insolvency, including administration and pre-pack solutions.
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CONCLUSION: UNDERSTANDING YOUR OPTIONS EARLY
A pre-pack administration can, in the right circumstances, preserve an underlying business by arranging a sale before administration and completing it immediately or shortly after the administrator's appointment.
However, it is a formal insolvency process — not a shortcut around a company's financial obligations. The administrator must act within the statutory framework, while connected-party transactions are subject to additional safeguards and scrutiny.
At VOSCAP, we help directors assess their company's financial position and understand the restructuring and insolvency options available. The aim is to identify the most appropriate route forward while there is still an opportunity to protect value and achieve the best possible outcome.
If your company is facing financial pressure, or you are concerned about whether the business can continue in its current form, our team is here to help.
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This article is intended as general information and should not be treated as legal or insolvency advice. The suitability and consequences of a pre-pack administration will depend on the individual circumstances of the company.
ABOUT VOSCAP
Voscap’s primary objective is to save your business. Our team of experts’ knowledge in restructuring and turnaround assignments is invaluable when assessing the best option available to your needs. With experience spanning several decades, we have the skill and resources to provide viable solutions within all industry sectors. All organisations go through difficult times and we are here to help. From small to multi-million turnover businesses, we have dealt with the most complex of cases. We offer an initial free assessment in analysing your financial position and providing clear and precise advice making your experience a simple non-complicated process.