When Can You Use a Pre-Pack?

When can you use a Pre-Pack?

A Pre-Pack might be used in a sale to an unconnected purchaser or to a purchaser including the management of the insolvency company.

If you are the director of a business and you are considering pre-pack as an option to tackle insolvency, it shouldn’t be considered an easy option compared to other procedures.

You can use the pre-pack process if you consider that although you have an insolvent business, there are elements which are viable which, if will enhance realisations if sold prior to the company being placed into administration.

Often the pressure of creditor demands can mean that selling the company/assets is the only viable alternative to other insolvency processes.

The new company or third party purchasing the business/assets should have sufficient capital available to complete the sale under the terms agreed.

The business/assets will need to be independently valued to ensure that assets are being sold at their true value.

A pre-pack should only be used as part of a genuine attempt to improve the position of creditors/stakeholders rather than simply a way of escaping creditor demands. A pre-pack arrangement is subject to strict guidelines that must be adhered to.

Times when pre-pack may not be an appropriate option

  • The overall perception of creditors is that the process has been abused, with the potential that the new company will not receive the support required from key suppliers
  • The transfer of any staff under the 2006 regulations entitled “Transfer of Undertakings (Protection of Employment)” or TUPE, may result in the purchasing company adopting a significant liability from day one for the staff.
  • The bank which funded the company may decline to be involved in funding the newco.
  • HMRC may consider it appropriate to obtain security from a new company if they consider the directors have a history of tax non-payment. This can impact on the cash flow of the new company from the outset. Furthermore if wrongful trading is found to have occurred, directors can still be subject to penalties which may impact on their role in the new company.