A lot of modern businesses experience difficulties in today’s economic climate. That is a fact. So when an insolvency happens, how properly it is managed could mean really mean life or death for a company. A popular solution that has surfaced in the past few years has been pre-pack administrations. With this “method” companies are able to “seamlessly” transition even when faced with insolvency.
What does pre-pack administration mean, anyway? These pre-packaged insolvencies or administrations, or what has been known as “pre-packs,” are an effective way to expedite the restructuring of a company before it has to declare insolvency. This basically means that with the use of a pre-pack system a business can be sold to existing directors or even to a third party without disruption of service or activity.
Pre-pack administrators create a plan, sale and purchase contract, and sell the assets of the business and the business itself to new owners. These businesses are protected by the courts when the transaction is happening and they are not forced to stop working and trading, which means the company will not lose value because of interruption in their trading. This makes it a somewhat low cost manner of transferring a business in troubled times.
You could see how this is an attractive option for troubled business owners and their prospective buyers. It doesn’t even matter if it facilitates the introduction of a new owner or is part of a transaction happening as part of fund raising being made by the existing board. However, it is still up to debate whether this is a quick and effective way of letting new owners catch up with an existing business’ activities speedily and without as much bad press.
The pre-pack system has been under much scrutiny by the government. This investigation could even result in having to communicate the desire for pre-packing at least three days before it happens. This idea has been discussed back in 2011 but it has been dismissed because of the bad publicity it might bring and how it can negatively affect a business’ assets and its value.
It has been brought back into the spotlight because some creditor experts worry and say that pre-packs could possibly be abused. The experts feel that creditors need a bigger say in how to manage this process. With a notice period, creditors will be able to share any of their worries and concerns, and maybe appoint their own independent liquidator. If appropriately used, the pre-pack system can bolster the creditors’ position. However, if it is handled poorly, the creditors can lose out. It is important to develop a system that can assuage their worries but also become an effective way to transfer a company.