Administration

As you know, administration is the formal insolvency process that puts a company under the control of an external manager (formally known as the administrator) to see if the company can be recovered so it can trade viably.

If this is impossible then they would look to achieve the best return for creditors through either a whole or part sale of the business and its assets, which could include a procedure known as a pre-pack administration.

An accountants guide to administration

There are several immediate benefits for your clients if they decide to place their business into administration.

Firstly, the administration provides an automatic moratorium halting any existing legal actions and preventing creditors from taking any more.

As well as providing some official “breathing space” for your client, they also give the administrator sufficient time to accurately assess the financial situation and begin to implement any changes they deem necessary.

Another reason why an administration is an attractive option is that they generally provide a better deal for creditors than a liquidation would.

The business will either continue to trade, eventually making sufficient profits to repay arrears or if it’s sold then the value of its assets will be protected more than if it went into liquidation.

Even if the aim is for the business to ultimately emerge from administration and trade on or enter a company voluntary arrangement (CVA) to repay debts, the current management would cede control of the business to the administrator for the entirety of the process.

If the administration is successfully concluded, previous management will have the opportunity to regain control of the business. If they have had to sell the company to raise funds to repay creditors then management will have the opportunity to buy it but will have no direct input into the sale process itself.

Alternatively, the administrator can look to arrange a sale of the business to entirely new owners if that would produce a better outcome for all parties including creditors.

If buyers interest leads to a sale and can be agreed at an early stage of the process then the administrator can arrange a deal more quickly through a pre-pack administration sale.

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Pre-pack administration: what is it?

A pre-pack administration is when the administrator takes over a business and prepares its assets for sale to take place as soon as is practicable after the company enters insolvency.

The name “pre-pack” comes from the process itself, where the marketing and most of the sale terms are agreed in advance of the formal insolvency. So the deal is literally “pre-packed” and ready to go.

Previously the term related solely to the administration insolvency procedure but more recently pre-pack can refer to any pre-arranged insolvency sale. In fact the process is more commonly used via liquidations than administration.

As pre-packing has become more widely used it’s become a little mischaracterized and has sometimes been criticised for lacking transparency and excluding creditors from the decision making process.

However, it remains a popular and highly effective insolvency mechanism for businesses.

Pre-packing creates a seamless transfer of assets and employees to new owners. As it allows for continuity, it reduces any redundancy requirements keeping a higher value in the business.

Ultimately this generates a higher return of funds back to creditors than if the company were to shut down and be liquidated.

How does a pre-pack administration work?

As it’s still an administration it has to be carried out by a licensed insolvency practitioner like any other to ensure a fair process for all stakeholders and that all relevant practical and ethical guidelines are followed.

Whilst anyone can purchase the assets of a company in a pre-pack administration, most businesses have a higher value to their current management. As such most pre-packs tend to lead to a sale to entities either wholly or partly composed of members of previous company management.

The typical pre-pack sale would include the transfer of any work-in-progress, goodwill including the company name, website and brand, any physical assets including stock, fixtures and fittings.

The value of any asset sale would be recommended by an independent valuation agent. If the buyer is a connected party, the buyer must also obtain a 2nd opinion from an evaluator as to whether the transaction represents best value for creditors. Alternatively creditors must vote in favour of the transaction taking place on any connected party sale in the first 8 weeks of the administration.

Regarding employees, if any are brought across as part of the business then their rights will be deemed to have been transferred with the sale as TUPE (Transfer of undertakings protection of employment rights) would apply.

What else does a pre-pack administration involve?

We can’t speak for anyone else but our fees for arranging a pre-pack administration are the same as they would be for a liquidation. Your clients can use our online liquidation fee calculator to get an accurate idea.

Anybody considering buying back their business through a pre-pack should also consider that the sale price will also comprise:

Physical assets
Work-in-progress and goodwill
Other company assets
Assumed redundancy costs

Outstanding debtors do not usually form part of the sale so they should also make some working capital arrangements to cover any debt repayments.

There could be some additional funding options available to cover these which we might be able to assist with on request.

Pre-pack administration - frequently asked questions

There are some questions about pre-pack administrations that recur time and time again so we’ve compiled this quick summary you can refer to if your clients ask.

Is pre-packing legal?

Absolutely. It is a formal legal process in itself so has to be carried out by a licensed insolvency practitioner.

Is it expensive?

Directors can use our online liquidation fee calculator to get a more accurate idea about their individual circumstances but pre-pack fees will be the same as for liquidation. If company assets are worth materially more than the fees then they would only need to pay for the assets of the business as the fees would be drawn from this.

It may also be possible to make part payment in instalments spread over a convenient period.

How are business assets valued and how are they marked for sale?

Independent valuation agents who specialise in asset sales and insolvent companies will value the assets.

Only assets of sufficient value are marketed. For small value asset sales it’s usually not cost effective or prudent to place them on the open market as long as a “fair value” offer for them has been received in advance.

Can the company name be reused?

Yes but the company’s “goodwill” must be purchased in order to do so. The owners of the new business will also be required to comply with obligations to provide notice to creditors of the transfer.

Can offers for assets be rejected?

Yes if the independent agents feel that more value could be achieved on the open market. This does not mean that they would automatically reject or accept an offer.

If the bidder feels their offer is representative of the true value of the assets then they will have the opportunity to negotiate directly with the agents and explain their reasoning.

What happens with employees during a pre-pack sale?

If the sale is agreed before insolvency then all employees rights will transfer across to the new business under TUPE. This would also include entitlements such as holiday pay and any accrued redundancy. This is an additional cost that purchasers would need to include in their financial planning.

If the company enters liquidation first however then agrees the sale, it’s possible that staff are not automatically transferred and may be able to claim from the National Insurance fund. This requires expert advice from accountants as part of the financial planning process.

Can the company occupy the existing premises

This depends on the lease the company operates and the ownership situation. If rented then all negotiations would be carried out with the landlord.

Are funding options available to assist with the asset purchase?

There are and we would be happy to discuss any options that are required.

If you or they have any questions about administration then please get in touch with one of our team of expert advisors directly.

How does a pre-pack administration work?
What else does a pre-pack administration involve?
Pre-pack administration - frequently asked questions

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Frequently Asked Questions about Administration

Will creditors still be able to chase me for repayments?

No. Administration provides an automatic moratorium preventing creditors from taking further enforcement action so it provides a necessary breathing space.

Does administration provide a better deal for creditors than liquidation?

Generally, yes. Administration will usually provide a better return for creditors than liquidation because the business will either make profit from continuing to trade or if it is sold as part of a pre-packaged administration then the value of assets will be protected.

Is administration free?

Costs can vary regarding the complexity of the process but a pre-packaged administration is highly regulated, as a sale should represent the best value for creditors.

Can I continue to run my business myself?

No. Once a notice of appointment is filed in court, control of the company passes to the administrator even if the longer term aim is to enter a CVA.

After administration will control of my company revert back to me?

Possibly. If the business emerges from a CVA then it will. If the administrator eventually has to sell the business, the previous management will have an opportunity to buy it, although they will have no input into the sale process.

Will directors be interviewed if the company goes into administration?

As part of the administration process, the insolvency practitioner is obliged to examine and report on the actions of directors leading up to the administration.

This is usually a straightforward process to determine that all affairs have been handled properly. It is possible, but rare, that if a director is found to have acted improperly then they could be disqualified from being the director of a limited company for a period of time and/or face a fine too.

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