Tag Archives: Pre-Pack

Pre-Pack Administration & Liquidations

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The current economic climate has seen a growth of businesses being “pre-packed”. And it is not without controversy. The whole issue of “pre-packing” can send blood pressures through the ceiling particularly with unsecured creditors.
In simple terms, in a “Pre Pack” a buyer is lined up for a struggling business before it goes into administration or liquidation. It is invariably an option taken when all others have been exhausted. A common situation is where a business is carrying historical debt which it can no longer afford to service. The core business may well be still viable and of course if peoples’ jobs are on the line it may be judged to be appropriate to pre-pack.
In many cases the owners of the existing business form a new company which in turn buys the assets of the old company from the Liquidator or Administrator, but leaves behind the debts. There are those who feel this is morally wrong but there are always differing viewpoints. The procedure is perfectly legal but has to be arranged within strict guidelines. Administrators are appointed to act by the Court.
As with many things in life there are winners and losers. A topical case was the recent sale of the assets of Cobra Beer to Coors, immediately after Cobra Beer entered administration. Whilst this Pre-Pack deal left suppliers out of pocket to the tune of about £75 million, it also preserved the valuable brand and saved many jobs.
There have been numerous other examples where a company has had assets and under a “pre pack” sold those assets back to a new company owned by the original owners. Understandably, such situations can provoke anger among suppliers and landlords, many of whom can be left with unpaid bills. However, quite often some, if not all, staff keep their jobs. Tax-payers may question why they should foot the bill for unpaid tax bills often written-off in such arrangements but that too can be countered with the savings of not paying unemployment benefits. It is true to say that inevitably business owners themselves will have already lost significant amounts.
One criticism often raised is that the assets are sold at below market value (which reduces the amount available to pay creditors). In reality there is often a limited market for the assets. For example, I spoke to a watch repairer whose assets comprised £25000 worth (at cost) of stock; when I asked what the stock was, he told me it comprised 3 million cogs, springs and squiggly bits that make up a watch’s innards! He bought them back from the Liquidator ( -not Wilson Field in this case) for £3000, which was the best offer the Liquidator could raise.
Looking at the bigger picture, as a nation we can ill afford for the economy to contract when it is slowly climbing out of recession – so the more businesses which are saved the better.
In such situations the Administrators (-all are Licensed Insolvency Practitioners) work under very strict rules to obtain the best position for creditors of the company. Wilson Field employs a number of Licensed Insolvency Practitioners and other professionals. If you are running a business which has cash flow problems and are concerned about the future, please ring Freephone 0800 458 3320 and ask for Phil or visit our website at www.wilsonfield.co.uk – and don’t delay as this can severely restrict the options available to you.

Is a “Pre-Pack” the Answer?

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Bad debts, falling sales, cash flow problems – are you “wrongfully trading “?– is a “pre-pack” the answer? Well, it’s not quite as simple as that. If your company is facing serious financial difficulty you may have heard of (and be worried about ) wrongful trading , or as it is sometimes known ”trading whilst insolvent”. It’s a complex subject about which there are many myths and rumours circulating. And there are very serious consequences of continuing to trade when you know your business is insolvent. If you are unsure then you should take advice without delay.

Pre-pack Administration attracts much attention in the media but is only one of a number of insolvency procedures available to struggling companies and it may not be the most appropriate for your company.

How does it work? A pre-pack is where a buyer is lined up for an insolvent company’s business (or assets) before it goes into a formal insolvency process. It allows an administrator to quickly and confidentially sell a failing business before it is permanently damaged.

Invariably, whilst potential purchasers are approached in advance and valuation exercises performed, little open marketing of the business is carried out. It can be sold to anybody but it is often existing management who are in the best position to move rapidly as little or no due diligence is required.

Critics often dislike the concept of existing management buying back the business and then continuing to trade clear of the original debts in a new “phoenix” company. Unsecured creditors kept in the dark are understandably often suspicious of the pre-pack procedure.

However, pre-packs can be invaluable in keeping a business trading, saving jobs and in providing a better return for some creditors when compared to liquidation. Additionally, it enables the business to survive and retain some goodwill value.

So, if your business has cash flow problems and you are worried about wrongful trading Wilson Field can advise you. We can give you guidance which may help you not just to survive this recession but maybe come out of it in a stronger position. Each situation is unique, and your company’s circumstances will dictate the best way forward. A pre-pack may be an option but we will outline all other possible alternatives. Our staff are professional, constructive and experienced dealing with similar situations. For free initial advice telephone Phil on 0114 235 6780.

Pre-packs – Pros and Cons

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The reality of a business going through insolvency is that the creditors very rarely receive all of the money owed to them. It is therefore more accurate (and helpful) to consider what creditors might reasonably expect in a distressed situation. When other alternatives such as re-financing or a Company Voluntary Arrangement (CVA) have been considered and, for whatever reason dismissed, a pre-pack administration is sometimes a viable way forward. There are pros and cons.

Critics claim…

Pre-packs are a ‘rip-off’ – It is understandable that creditors who are informed of a pre-pack deal after the fact would be suspicious of the procedure. Critics also believe some business people use pre-packs to get out of debts and obligations so creditors lose out as a result.

It isn’t right that a business is sold back to the owner of the company – The sale of a business back to connected parties is not exclusively a feature of pre-packs. In 52% of all standard business sales the business was sold back to connected parties. This figure is 59% in pre-pack administrations. This differs from a ‘phoenix’ where the sale always involves the owner or connected parties. Faced with the decision between selling the business to a connected party or winding-up the company , the best decision for the creditors is to sell the business on, rather than allowing the business to fail as the returns would be considerably less.

On a more positive note…

They provide a better return for secured creditors –the average return for secured creditors in a pre-pack is 42% compared with 28% in a business sale. The average returns to unsecured creditors in insolvency cases, however, are very low, – pre-packs provide just 1% of return, whilst in business sales the average return is 3%.

The value of the business is retained – Pre-packs are deployed successfully when the business’ principal assets are the employees, forward contracts or intellectual property, as in all service businesses. Once word of a company’s financial difficulty gets out, it becomes much harder for IPs (Insolvency Practitioners) to retain the staff, suppliers and customers necessary to keep the company viable. Suppliers and customers will attempt to take their business elsewhere, leaving the company with few assets and, effectively, no business. Therefore, pre-packs are a tool to bring about the sale of a business which may have otherwise simply shut down.

There have been moves to improve the transparency of pre-packs. SIP (Statement of Insolvency Practice) 16 was introduced in January 2009 to require IPs to disclose to creditors why the decision to pre-pack was taken, the large amounts of associated information concerning that decision and the connections between the purchasing company and the company in Administration, i.e. the Directors and Shareholders.

If you are running a business which has cash flow problems and are concerned about the future, please ring Freephone 0800 458 3320 and ask for Phil at Wilson Field, see www.wilsonfield.co.uk or e-mail Phil – p.meekin@wilsonfield.co.uk , – and don’t delay as this can severely restrict the options available to you.

Pre-Packs Preserve Jobs

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Pre-pack liquidations and pre-pack administrations are found to preserve more jobs than any other type of insolvency process according to reports published by R3 (R3 is the Association of Business Recovery
Professionals is the UK’s leading trade association for insolvency, business recovery and turnaround specialists in the UK. It represents 97% of licensed Insolvency Practitioners. It promotes best practice for professionals working with financially troubled individuals and businesses). 92% of pre-packs have resulted in a 100% transfer rate of employees to new owners, compared with 65% in other types of sale following insolvency.

Pre-packs are receiving greater attention in the media than ever before and such cases are expected to rise in line with general company insolvencies. A controversial technique, it is used to save struggling businesses by the insolvency industry, rescues more jobs than traditional methods.
What is a pre-pack?
A pre-pack is a deal for the sale of an insolvent company’s business (and/or assets) which is put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business will usually have been worked out before the insolvency practitioner is formally appointed, and is then rapidly executed once the appointment is made.
The business is usually sold with little or no open marketing. Unsecured creditors are usually not informed of the pre-pack until after it has been completed. Secured creditors will usually be aware of the transaction as they will generally be required to release their security.
Pre-packs have been criticised for being a ‘stitch-up’, with some cases having drawn stinging criticism. Businesses can write off debts owed to creditors through the arrangements, with the new owners sometimes the same as the old owners.
Practitioners, in particular, have argued that where people-businesses, which trade on their reputation, are concerned, a quick administration is essential. This type of procedure has been used more frequently by practitioners since the introduction of the Enterprise Act 2002, which looked to encourage the rescue of more businesses.
Insolvency Practitioners’ use of pre-packs is heavily regulated. It has been argued that there could be a massive negative impact on jobs if pre-packs were banned and that this would result in more liquidations. If a business is making a loss and it can’t be sold, then all you can do is liquidate. Unless it was viable as a profit-making sale you limit your alternatives.

If you are running a company which is experiencing cash flow problems and would like to chat through alternatives available, please ring Freephone 0800 458 3320 and ask for Phil or visit our web site at www.wilsonfield.co.uk

Pre-Pack Administration & Liquidations

Posted on by
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The current economic climate has seen a growth of businesses being “pre-packed”. And it is not without controversy. The whole issue of “pre-packing” can send blood pressures through the ceiling!

In simple terms, in a “Pre Pack” a buyer is lined up for a struggling business before it goes into administration or liquidation. It is invariably an option taken when all others have been exhausted. Recent high profile examples before Christmas included Whittards of Chelsea and The Officers Club and more recently the restaurants of Anthony Worral Thompson. A common situation is where a business is carrying historical debt which it can no longer afford to service. The core business may well be still viable and of course if peoples’ jobs are on the line it may be judged to be appropriate to pre-pack.

In many cases the owners of the existing business form a new company which in turn buys the assets of the old company from the Liquidator or Administrator, but leaves behind the debts. There are those who feel this is morally wrong but there are always differing viewpoints. The procedure is perfectly legal but has to be arranged within strict guidelines. Administrators are appointed to act by the Court.

As with many things in life there are winners and losers. Take the designer clothing chain USC which went into Administration at the end of last year. It had 58 outlets and under a “pre pack” sold 43 of those stores back to a new company owned by the original owners. Understandably, such situations can provoke anger among suppliers and landlords, many of whom can be left with unpaid bills. However, out of 1427 staff, 1127 kept their jobs. Tax-payers may question why they should foot the bill for unpaid tax bills often written-off in such arrangements but that too can be countered with the savings of not paying unemployment benefits. It is true to say that inevitably business owners themselves will have already lost significant amounts.

One criticism often raised is that the assets are sold at below market value (which reduces the amount available to pay creditors). In reality there is often a limited market for the assets. For example, I spoke to a watch repairer whose assets comprised £25000 worth (at cost) of stock; when I asked what the stock was, he told me it was 3 million cogs, springs and squiggly bits that make up a watch’s innards! He bought them back from the Liquidator ( -not Wilson Field in this case) for £3000, which was the best offer the Liquidator could raise.

Looking at the bigger picture, as a nation we can ill afford for the economy to contract any more than it is already doing. In such situations the Administrators (-all are Licensed Insolvency Practitioners) work under very strict rules to obtain the best position for creditors of the company.

Wilson Field employs a number of Licensed Insolvency Practitioners and other professionals. If you are running a business which has cash flow problems and are concerned about the future, please ring Wilson Field, see www.wilsonfield.co.uk or e-mail Phil -p.meekin@wilsonfield.co.uk , – and don’t delay as this can severely restrict the options available to you.