This is a guide for directors and advisers to outline the pros and cons of pre-packs.

What is a pre-pack?
A pre-pack is short for a pre-packaged sale agreement made by an administrator (a licensed insolvency practitioner) to dispose of a business or parts of a business, generally as a going-concern. It is a term used mainly in connection with an administration to rescue or restructure a company that is in financial difficulty.

What are the issues?
Pre-packs can attract criticism because the pre-pack agreement is made behind closed doors, generally between the administrator and the company's management. It will result in a quick sale on the appointment of the administrator.
To creditors, or those outside the company who might be interested in also acquiring a piece of the action, this can all look quite bad and they may feel short-changed. Whether they are or not is a matter of opinion; you need to put it all into perspective.

The administrator’s job
The main objective of an administrator on appointment is to try and rescue the company, as this will save jobs and keep the business going. An administrator does not have much time to act, as once a company is in financial distress it loses goodwill very quickly, key members of staff are likely to jump ship and if trade has actually ceased, stock and work in progress may be deteriorating. He is required to weigh up the situation very quickly. Additionally, he must report to creditors and consider retaining employees in only a short time frame once appointed.

Issues for directors
As soon as the directors see signs that their company is in financial difficulty they need to obtain professional advice and take action to protect the interests of the company's creditors. This is essential as if they continue to trade while the company is insolvent as they may be held personally accountable to creditors, see FAQs for Directors and insolvency.

When the directors contact an administrator they will discuss the options before any formal appointment is made. It may be apparent that some of the business can be saved, or perhaps management is willing to do a buy-out. If there is something positive on the table the administrator may well start putting together a sale agreement (pre-pack), so that once he is appointed this can be put through as seamlessly as possible.

Issues for company and creditors
Administrators have a duty to the other creditors but, if the business can be saved as a going concern then it is their duty to pursue this option. There is never any certainty about the price which can be obtained on the sale of a business as a going concern. The market price may fall when buyers realise that the company is in financial difficulties and the sale of a business on the open market may realise less than if done behind closed doors, by a pre-pack.

At the end of the day, an administrator has to perform a juggling act and get the best deal for all. This may be by using a pre-pack, or it may be better to go for the open market. It is a question of judgement.

There is a Statement of Practice which all insolvency professionals must adhere to on the use of pre-packs. This is designed to safeguard the interests of creditors.

Alternatives to administration
The directors might consider entering into a Company Voluntary Arrangement (CVA) as a more cost-effective method of rescuing all or part of the business.

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