What is a Pre-Pack Administration?

A pre-pack administration is where a company, often insolvent, has its assets sold to a new entity – usually the directors who form a new company or ‘newco’ for this purpose. This is a commonly used and very effective way of preserving the value of a brand, allowing a quick sale that minimises disruption to trade, often saving jobs, and providing a much better return to creditors than liquidation.

However, they have been criticised for their lack of transparency and, particularly in cases where the new purchase is to a connected party, for the way in which it can lead to discrimination against unsecured creditors. This criticism has been exacerbated by the publication of the Graham Report, which recommended that administrators should require the approval of unsecured creditors before selling assets to a connected party.

Navigating Financial Turbulence: Exploring Pre-Pack Administration

Generally, in a pre-packaged sale the new business, or ‘newco‘, will have already been agreed to purchase the assets prior to the appointment of administrators and this agreement will be confirmed on the date of the administration order. The Administrators will be responsible for ensuring that the sale is executed as efficiently as possible, and once this is completed the Directors of the new company will assume control of the business – thus ending the administration.

A pre-pack is an appropriate course of action when the Directors have a good chance of successfully salvaging the business and can prove that the new business will be viable in the future. This will be particularly the case if the company faces creditor threats such as HMRC demanding payment for PAYE and VAT, or a winding up petition has been issued.