Expect an increase in pre-pack administrations over the next 6 months as panic-stricken company directors consider their restructuring options post lockdown. Depending on the circumstances, a pre-pack administration can offer huge benefits to the director of a profitable, but insolvent company.
The procedure is a useful restructuring mechanism that helps business owners place insolvent companies into administration so they can legally:
- Relieve themselves of the debts
- Transfer key assets into a new company
- Start trading immediately
Some directors love pre-packs because once the assets are in the new company, they can use the income generated to pay for:
- The assets
- The administrator / insolvency practitioner (IP)’s fees
Furthermore, a calculated director in a pre-pack can save a fortune by:
- Paying the administrator (IP) in instalments
- Paying less than the assets are really worth
The director is the only person who knows the real value of the business, especially if the assets are records of clients and prospects, patents, copyrights or some other intellectual property.
Consequently, directors can make huge gains when their assets are undervalued in a pre-pack.
For example, imagine the director of a company with assets of £300,000 and outstanding debts of £800,000 owed to creditors.
Their company makes money, but is insolvent. Instead of losing everything, they decide to evade the creditors with a pre-pack.
If the director pays an administrator (IP) £200,000 to facilitate the procedure, it’s possible that within 10 days they’ll have:
- Lost £800,000 of debt
- Paid only £200,000 for assets worth £300,000
- A new company generating income
Some might describe the director’s actions as ‘heartless’. Others consider the pre-pack option as just another strategic business decision.
Previously, the new entity was called a ‘Phoenix Company,’ likening the rebirth of the mythical phoenix bird to the formation of a business from the collapse of another through a statutory insolvency procedure.
Generally, a pre-pack is a win-win situation for a company director. But some IPs like to play games after they become the administrator. They may say something like:
“In the past 24 hours I’ve been contacted by 2 prospective buyers who are both offering more than you. What do you want to do?”
To avoid this happening, it’s always best to seek advice from an independent professional when considering any insolvency procedure.
An independent insolvency expert can advise you and discuss terms with the IP on your behalf. They can help secure a commitment from the IP to sell the assets to you at a predetermined price.