When a pre-pack administration is the right solution

A pre-pack administration is a formal insolvency procedure used when the sale of all or a part of a company’s business is anticipated and is used especially where cashflow is tight and time is of the essence.

In the weeks preceding the appointment of an Administrator significant work is undertaken behind the scenes to market the business and negotiate the terms of a sale to complete on day 1 of the administration, thereby ensuring a smooth transition of trade.

In the past this has led to criticism of the procedure for a lack of transparency which has been claimed to unfairly prejudice unsecured creditors. As a result, tighter legislation has been introduced when the sale is to a connected party, whereby a qualifying report from an independent evaluator is obtained or creditor approval for the sale is sought in the alternative, before the sale is completed.

Despite the criticism a pre-pack administration is often the right solution as it protects the value of the business and reduces the costs that could be incurred to trade the business in an insolvency procedure while a sale is negotiated.

In a recent case we assisted the directors of a company that developed aerospace battery systems for use in the aerospace and defence industry.

Whilst the company had successfully demonstrated the viability of its product it found it difficult to secure alternative investment, which in turn led to cashflow problems. However, with contracts in the pipeline the directors still considered that the business had value.

To ensure a fair value was obtained we advertised the business for sale on 2 internet sites and contacted interested parties known to the directors and those operating in aligned markets.

Each expression of interest was followed up and further information provided. Given the financial position of the company a deadline was set for the receipt of indicative offers which resulted in 4 bids being received. To maximise the realisations for creditors, all 4 bids were followed up and further time allowed for each party to undertake additional due diligence with best and final offers then requested.

A final offer was received for the assets of the company, which greatly exceeded the break-up valuation and included the transfer of the 35 staff. The sale completed on day 1 of the administration which was 42 days from our formal instruction.

Without being able to use this process it is likely that the company would have closed, resulting in the assets being sold on a break-up basis and adding redundancy and pay in lieu of notice claims to the proceedings.

Although still in the early days of the administration we expect that a dividend of 100p in £ will be made to preferential creditors and a significant dividend will be paid to unsecured creditors being a far better outcome than would have been achieved in an alternative procedure.

Posted in Insolvency, News, Newswire.