Pre-pack administration

Pre-Pack Administration: Frequently Asked Questions

When a company is experiencing serious financial difficulties, acting quickly can be critical.

A pre-pack administration may provide a way to preserve the underlying business, protect jobs and achieve a better outcome for creditors than an immediate liquidation.

This guide answers some of the most common questions about pre-pack administrations and how the process works.

1. What is a pre-pack administration?

A pre-pack administration is an insolvency process in which the sale of all or part of a company’s business or assets is negotiated before the company formally enters administration.

The sale is then completed by the administrator immediately, or shortly after, their appointment. This can allow the underlying business to continue trading with minimal interruption.

The administrator must be satisfied that completing the proposed transaction is consistent with their statutory duties and the interests of the company’s creditors as a whole. Professional guidance also requires transparency about why a pre-packaged sale was considered appropriate.

2. Why might a company consider a pre-pack administration?

A pre-pack sale may be considered where a rapid sale is likely to preserve more value than a prolonged period of trading in administration or a break-up sale of the company’s assets.

Potential objectives include:

• preserving the viable parts of the business;

• protecting employment;

• maintaining customer and supplier relationships;

• avoiding damaging disruption or publicity;

• protecting the goodwill and reputation of the business;

• reducing the costs and risks of trading in administration; and

• achieving a better result for creditors than an immediate liquidation.

Whether a pre-pack is appropriate will depend on the company’s financial position, the value of its business and assets, the available purchasers and the likely outcome under the alternative insolvency options.

3. Who arranges the sale?

Before the company enters administration, its directors will usually work with a licensed insolvency practitioner to explore the available restructuring and insolvency options.

The proposed sale may involve:

• obtaining independent valuations;

• marketing the business;

• identifying potential purchasers;

• negotiating heads of terms;

• investigating available funding; and

• preparing the proposed sale documentation.

Solicitors are normally instructed to advise on the legal structure of the transaction and prepare or negotiate the sale agreement and related documents.

However, once appointed, the administrator must exercise their own independent judgment. The administrator, rather than the directors, ultimately decides whether completing the proposed sale is appropriate.

4. Can the existing directors buy back the business?

Potentially, yes. Existing directors, shareholders or management may purchase the business and assets through a new company, sometimes referred to as a “newco”.

A sale to existing management or another connected person is likely to receive particularly careful scrutiny. The proposed consideration should be supported by appropriate valuation and marketing evidence, and the administrator must be satisfied that the transaction is in the interests of creditors as a whole.

Where an administrator proposes to make a substantial disposal to a connected person during the first eight weeks of the administration, the transaction cannot proceed unless:

• creditors approve the disposal; or

• the connected purchaser obtains a qualifying report from an independent evaluator, which the administrator must receive and consider.

These requirements are contained in the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 and apply in England, Wales and Scotland

Directors should also obtain advice about:

• using the same or a similar company name;

• funding the acquisition;

• conflicts of interest;

• their conduct before the administration;

• personal guarantees; and

• the transfer of employees, contracts and liabilities.

5. What happens to employees?

Where the sale involves the transfer of a business or undertaking that retains its identity, employees assigned to that business may transfer automatically to the purchaser under the Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly known as TUPE.

If TUPE applies, the transferring employees will generally move to the purchaser with continuity of employment and their existing contractual rights preserved, subject to the particular insolvency provisions and any lawful changes.

TUPE is fact-sensitive. Both the seller and the proposed purchaser should obtain specialist employment advice at an early stage, including advice about employee-information and consultation obligations.

6. Can employees still lose their jobs?

Yes. Although preserving employment is often one of the principal benefits of a pre-pack sale, it does not guarantee that every job will be protected.

Redundancies may occur where:

• only part of the business is purchased;

• particular roles are not required by the purchaser;

• redundancies are necessary before completion;

• the business needs to be reorganised; or

• the purchaser cannot support the existing workforce.

The timing and reason for any proposed redundancies can affect the legal position, including whether TUPE applies and which entity is responsible for employee claims. Specific employment-law advice should therefore be obtained before decisions are made.

7. What are the advantages of a pre-pack administration?

Potential advantages include:

Business continuity

The sale can be completed quickly, reducing interruption to trading and helping to retain customers, suppliers and key employees.

Protection of jobs

Employees may transfer to the purchaser as part of the sale, helping to preserve employment and operational knowledge.

Preservation of value

A rapid sale may protect goodwill, intellectual property, customer relationships and other assets whose value could deteriorate during a lengthy insolvency process.

Reduced trading risk

The process may avoid the costs and risks associated with the administrator continuing to trade the business while seeking a purchaser.

Confidentiality before appointment

Negotiations can take place before the formal administration, reducing the risk that premature publicity will damage confidence in the business. Appropriate disclosure to creditors will still be required following the administrator’s appointment.

Potentially better creditor outcome

A going-concern sale may generate a better return than closing the business and selling its assets separately.

8. What are the disadvantages and risks?

A pre-pack administration also has potential disadvantages:

creditors usually do not vote on the sale before it completes, except where approval is required or sought;

unsecured creditors may recover only a proportion of the amounts owed to them;

• suppliers may be reluctant to provide credit to the purchaser;

• the transaction may attract criticism if the purchaser is connected to the former directors or shareholders;

• employees may still be made redundant;

• contracts, licences and accreditations may not transfer automatically;

• personal guarantees given by directors will not normally disappear; and

• the purchaser will need sufficient funding for the acquisition and the continuing business.

Transparency is particularly important because creditors will usually learn the full details after completion. The administrator should provide sufficient information for creditors to understand why the sale was undertaken and how it was considered to serve their interests.

9. How is a pre-pack administration different from liquidation?

The principal difference is the intended outcome.

A pre-pack administration is normally used to achieve a rapid sale of the underlying business or its assets, often as a going concern. Although the original company remains in administration and may later be dissolved or placed into liquidation, the purchased business can continue trading through the buyer.

Liquidation is primarily concerned with collecting and realising a company’s assets and distributing the available funds in accordance with the statutory order of priority. It will commonly result in the company ceasing to trade.

However, liquidation does not invariably mean that every part of the business closes immediately. A liquidator may sometimes sell a business or assets to a purchaser, depending on the circumstances.

10. How does a pre-pack administration work?

A typical pre-pack process may involve the following stages:

Financial difficulties are identified
The directors recognise that the company is insolvent, or is likely to become insolvent, and obtain professional advice.

The available options are assessed
A licensed insolvency practitioner reviews the company’s financial position and considers administration, liquidation, a company voluntary arrangement, restructuring and other potential solutions.

The business and assets are valued
Independent valuations may be obtained for the company’s assets, business and goodwill.

The business is marketed
An appropriate marketing exercise is normally undertaken, subject to the need to preserve confidentiality, value and business continuity.

Potential purchasers submit offers
Offers may come from third parties, competitors, investors, existing management or connected parties.

The proposed sale is negotiated
The preferred purchaser, price, assets, employees and principal contractual terms are identified before the administration appointment.

The administrator is appointed
The company formally enters administration. The administrator reviews the proposed transaction and must exercise independent professional judgment.

The administrator completes the sale
If satisfied that the sale is appropriate and compliant, the administrator completes the transaction immediately or shortly after appointment.

Employees may transfer
Where TUPE applies, relevant employees may transfer to the purchaser with their employment rights protected.

The administrator reports to creditors
Creditors receive information explaining the background to the sale, the marketing and valuations undertaken, the consideration received, the identity of the purchaser and why the administrator considered the transaction appropriate.

The administration continues
The administrator deals with the original company’s remaining assets, creditor claims, investigations and distributions before bringing the administration to an end.

11. Is a pre-pack administration suitable for every company?

No. A pre-pack will not be suitable in every case.

Its suitability will depend on matters including:

• whether there is a viable underlying business;

• the availability of a credible purchaser;

• the value achievable through a rapid sale;

• the likely outcome for creditors;

• the availability of acquisition and working-capital funding;

• the company’s contracts, licences and regulatory position;

• employee and pension liabilities; and

• whether an alternative restructuring process could produce a better result.

Directors should obtain advice as soon as financial difficulties become apparent. Delaying advice may reduce the available options, damage asset values and increase the risk of creditor losses.

Case study example

Preserving a Regional Business

Weightmans advised stakeholders in connection with the sale of a distressed regional business employing more than 100 staff. By completing the transaction immediately following the commencement of administration, operations continued uninterrupted, key contracts were retained and the majority of jobs were preserved.

Can existing directors purchase the business?

Yes. Existing directors or management teams may acquire the business through a newly incorporated company, provided the transaction is independently valued and structured in accordance with insolvency legislation and best practice.

Weightmans experience

Our team regularly advises on:

• Management buy-outs from administration

• Connected-party acquisitions

• Compliance with the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations

• Funding arrangements for acquisition vehicles

• TUPE and employment considerations

• Restrictive name and branding issues

Why clients instruct Weightmans

Clients value our ability to combine:

• National insolvency expertise

• Corporate transactional support

• Employment and TUPE advice

• Commercial property expertise

• Banking and finance capability

• Regulatory and litigation support

This allows transactions to be completed efficiently and within challenging timeframes.

Our restructuring and insolvency team regularly advises insolvency practitioners, businesses, directors and stakeholders on distressed M&A transactions and business rescue matters.

Representative experience includes:

• Advising in connection with the administration and purchase of Chadderton Total Care, helping to preserve continuity of care for 106 users and minimise disruption to residents and stakeholders.

• Advising on issues arising from the restructuring and business sale relating to Lumley Castle, involving the preservation of a well-known iconic hospitality operation.

• Acting on matters involving Altitude Angel (in administration), a drone operation platform including advising stakeholders in relation to distressed business solutions and value preservation working alongside FRP Advisory.

• Advising buy-side in relation to insolvency-related issues affecting Merit Construction, involving the protection and realisation of business assets and stakeholder interests.

• Advising on the sale of the Feversham Arms Hotel & Verbena Spa by way of a pre-pack business and assets sale for PKF Littlejohn Advisory.

• Selling all Intellectual Property assets and domains in relation to Phones4U (in administration) and various entities for the joint administrators at PWC.