What is a pre-pack?
A Company in financial trouble, or one of its creditors, calls in legal advisers or an insolvency practitioner. Having examined the company, its assets and liabilities, various solutions may be recommended: winding up the company, continuing trading while an attempt is made to sell the business or pre-pack administration.
Winding-up is the most drastic solution and would be a last resort. Continuing trading is only possible where there are funds to cover the cost of the wage bill and other costs of running a business. Where those funds are not available and there is no possibility of trading the company on while it is in administration, the insolvency practitioner could recommend a pre-pack.
The insolvency practitioner will often try to identify discreetly if there are any parties that may be interested in buying the company. Often the directors will know the likely buyers and may have already been through a marketing process. Discretion is crucial because of the adverse affect that the suggestion of formal insolvency has on the confidence of the company’s staff, suppliers and customers and hence on its value.
If a potential buyer can be found, the insolvency practitioner will form an opinion of what the company is worth. There will generally be formal independent valuation or it maybe clear that there is only one party with an interest in the price, such as the bank.
If a figure can be agreed, the insolvency practitioner is appointed administrator and immediately sells the company to the buyer.
The business (usually including the workforce) is transferred to a new company and the proceeds from the sale are used to pay back creditors in the normal order or priority: secured creditors are paid first, followed by preferential creditors and, finally, unsecured creditors.
Source: R3, the Association of Business Recovery Professionals