Using a pre-pack to restructure your client’s business

Pre-pack administrations have seen a steady rise post-Covid, with pre-packs representing approximately 29% of the total recorded administrations in England and Wales in 2022.

Retail businesses have been among the most frequent users of pre-packs, as struggling High Street chains look to shed underperforming stores and restructure. However, construction firms and even professional services businesses have also turned to pre-pack administrations as a restructuring tool.

While the pre-packs that hit the headlines concern larger businesses, this is an insolvency tool that’s available for all types and size of company.

What is a pre-pack administration?

The aim of a pre-pack administration is to rescue a business by selling all or part of an insolvent company’s business and assets to a new corporate vehicle, leaving unsustainable liabilities with the insolvent company to enable a fundamentally viable business to continue to trade.

The process involves agreeing the sale of the company’s business and assets before appointing an administrator. Once the administrator’s appointed, the sale completes and the new entity takes the business forward.

In some cases, the buyer is the existing company director(s), shareholder(s) or investor(s), operating via a ‘Newco’.

When can a pre-pack be considered?

You’ll know better than anyone whether restructuring your client’s business is a viable option. These are the common scenarios in which we’d consider exploring a pre-pack with a client.

Cash-flow insolvency: If the company can’t pay its debts as and when they fall due, but its balance sheet shows that assets exceed liabilities, a pre-pack may allow for a viable business to restructure. The ‘slimmed-down’ business can move forward with new finance or investment in a new corporate vehicle.

Balance-sheet insolvency: The company's liabilities might exceed its assets. But if it still has a profitable core business, shedding the unprofitable parts through a pre-pack can allow the restructured business to continue trading, without the burden of legacy debts.

Funding issues: A pre-pack sale can attract new investors or lenders by presenting a debt-free business with a clean slate. This is especially helpful if the company’s been struggling to secure funding or investment into an insolvent corporate vehicle.

To keep the business open: If the company's assets are at risk of being sold piecemeal in a normal administration or liquidation, a pre-pack can preserve the business as a going concern without a disruption in trading.

The benefits of using a pre-pack administration

Not all insolvent businesses are doomed to fail. If your client’s business has the potential to return to profit in the future, and if they’re committed to the business, a pre-pack could be a good option for them.

Business could continue as normal: Pre-pack administration can help maintain business continuity by minimising disruptions to operations. This is crucial for preserving customer and supplier relationships and assisting in a more seamless transition to the new ownership.

It preserves business value: Pre-arranging the sale of the business and its assets to a new owner can avoid extended closure and loss of value, because the company is allowed to continue trading with minimal disruption. This helps maximise goodwill, asset realisations and returns for creditors.

It can save jobs: Because the business can often transition to the new owner without interruption, employees and their roles are more likely to be retained. Their rights and obligations transfer to the purchaser under TUPE regulations. This provides stability and keeps skilled staff, customer relationships and operational knowledge in the company.

Creditors get the best deal: By selling the business as a going concern, it might be possible to get a higher price for the company’s goodwill, debtors and assets. In turn this could mean more funds are available for distribution to creditors.

There are also a couple of warnings on the use of a pre-pack.

The fact that you’d have heard about pre-packs in the press shows that one of the disadvantages of using a pre-pack is that it could become public news. Your client might therefore be worried about damage to the reputation of the business and the trust of customers, suppliers and employees. However, with a little planning it’s possible to control the narrative around this process.

While it might be ideal for the new owners to be one or more of the existing company directors, the administrator is legally obliged to get the best result for creditors and conduct a wider, open and transparent marketing process. This could mean that the business is sold to a competitor.

However, the current directors or owners are usually the most likely buyers as they already have a good existing knowledge of the business.

Alternatives to pre-pack administration

Pre-pack administration is not the only option for struggling business. If your client’s business and situation isn’t appropriate for a pre-pack, we can look at one of these potential alternatives.

Company Voluntary Arrangement (CVA): A CVA allows a company to compromise its debts by negotiating a pence-in-the-pound offer with creditors, paying back the agreed sum over a set period. The company can continue to trade during the period of the CVA as long as it complies with the terms of the agreement. It’s important to note that a CVA doesn’t bind secured or preferential creditors without their consent.

Administration: A licensed insolvency practitioner is appointed as Administrator to manage the company's affairs and realise the business and assets. The business will continue trading under the control of the administrator while a marketing campaign to find a buyer is carried out.

Creditors' Voluntary Liquidation (CVL): If a business has no prospect of restructuring or a sale, the director(s) could opt for a CVL to wind up the company. Assets are realised to meet the claims of creditors. The business is then legally closed. In some cases, the directors are able to buy the assets of the company but not on a ‘going concern’ basis.

Every situation is different. We’ll work with you and your client to assess how viable a pre-pack administration is for their business and carefully evaluate the alternatives. Talk to us about your client’s situation by calling 01455 555 444 or emailing [email protected]