How does a pre-pack work?

Pre-Pack Administration is where an insolvent but viable business is sold to a third party or a phoenix company prior to going into administration or liquidation.

By selling the company’s assets before going into administration the creditors are not aware that Pre-Pack is going on and therefore the company’s assets are protected whilst the sale takes place. Once the sale has taken place the old company goes into administration and at this stage the creditors are notified.

The process allows the new company to run the business without the burden of the debts and liabilities of the old company. The decision to enter Pre-Pack is usually made by the company’s directors if they find that their current debts are preventing them from running their business.

While some people believe that Pre-Pack allows assets to be sold for pennies rather than pounds, the strict laws governing Pre-Pack means that the process must be conducted under a licensed insolvency practitioner and the assets must be independently valued in order that a fare price is paid for them.

If the old company is being bought by the directors who have formed a new company they must still pay a fare price for the assets so will need to have funds in place to do this. Whist the directors are able to access funds for this, they have decided that it is more worth while to put their funds into running a new business rather than bailing out the old business.

Why choose Pre-Pack?
Pre-Pack is a quick and reasonably simple process which allows a business to continue to operate once it has decided to enter Pre-Pack. The process also allows the assets of the business and trade to continue under a new name without the burden of its debts and the action that is associated with it.

One of the biggest advantages is that the business can continue to operate with minimum disruption and employees are usually able to keep their jobs. This means that this is one of the most least disruptive and most positive insolvency processes. Pre-Pack is a great option for an insolvent business that is still viable and employs many people.

The ethics of Pre-Pack
Some people believe that Pre-Pack gives directors the ability to walk away from their responsibilities to their creditors and so see the process as unethical. The process however is governed by strict legal guidelines, which means that the process can only be entered into if it is in the best interests of the creditors.

The fact that Pre-Pack also allows the business to continue trading and means that employees can keep their jobs, also means that the advantages not only to the business but its employees often outweigh the disadvantages.