What actually happens?
- The directors instruct an IP of their own choosing to help place the company into administration.
- In a pre-pack scenario the IP recommends professional agents to help market part or whole of the business for sale prior to administration.
- A buyer is found and a sale contract is drafted.
- The administrators are appointed.
- The administrators then take control and immediately complete the sale contract on appointment.
When we first meet with the directors of a business we assess their finances, ask them what their objectives are and then go through the options available to them. If the company has a good core business but needs to reduce its liabilities in order to survive then we may suggest a pre-pack administration. It may also be very close to running out of money and cannot continue trading as it is.
There are special regulations covering pre-packs because of the controversy caused by a very quick sale of the business often to the same directors who ran it before (see SIP 16 and the Pre-Pack Pool).
To comply with these rules we instruct an independent valuer and business agent to value the company assets and market them for sale before the pre-pack happens. This is carried out confidentially in order to maintain employee and customer confidence but has to be enough exposure to the market to have a proper go at trying to actually sell the businesses. Often this is a balance – the directors want very limited marketing because of the reputational damage but we need to make sure it is being sold at a fair value.
The agent we use invites bids to be received by a deadline of noon usually within two or three weeks. Offers can be made by anyone including the current directors. Very often there will be a number of bids. The offers are assessed and the agent will recommend the best offer to accept. A sale is then agreed with a completion date set for the date of administration. Hence the term pre-pack. It has all been lined up to happen and is “pre-packaged”.
At the date of transfer, the new company takes over and continues to trade as seamlessly as possible. We meet with the employees and explain their rights because of the transfer of employer. We also write to all of the creditors within a week advising them of the sale and asking them to confirm how much they are owed.
Within ten weeks from the date of the administration we usually hold a creditors meeting. The directors would normally attend this meeting and all creditors are invited to attend. At this meeting the formal strategy is discussed and the outcome is decided as to what will ultimately happen to the company. This could be:
- the company moves into liquidation to enable a dividend to be paid out
- the administration continues
- the administration ends and the company is dissolved
If the only person who will be paid out of the administration is the bank then we do not normally hold a creditors meeting unless asked to do so by at least 10% of the creditors.
Initially suppliers (the creditors) who are owed money are quite upset when they find out about the pre-pack after it has happened. I can see why – quite often the same directors are just running the same business. A pre-pack needs to be very carefully considered and justified before it can be used and that there was no better alternative.