In the current economic climate pre pack administration is becoming an increasingly common choice for struggling businesses. Many companies in the UK are turning to it as a solution to overwhelming debt problems. What is pre pack administration and how can it benefit a business?
What is Pre Pack Administration?
Pre-pack admin is a process in which the assets of a business are sold before it is forced into a formal insolvency process. It allows a business to be sold without creditor's approval, thereby protecting the company from creditor attack in the process. The assets and day to day trading of the business can be purchased by a new company who can continue to trade without the burden of the debts incurred by the previous company.
When is it used?
Pre-pack administration is very useful when there are immediate threats to the viability of a business from its creditors. A common situation where pre-pack administration is appropriate is when a business is carrying debt that it can no longer afford to service but the core business may well still be viable. In this case the owners of the existing business form a new company which then buys the assets of the old company but leaves behind the debts.
What are the advantages?
For a struggling business pre pack administration can be beneficial for a number of reasons. With the sale of business assets being agreed in advance it allows the company to carry on free from debt. Where appropriate it releases the business from contracts and leases that may no longer be needed but can also existing connections with suppliers to be continued. In the some cases it may also guarantee a higher return to creditors than would otherwise be the case. In cases where the business is being bought by the previous owners it preserves jobs for directors and employees. It can also help avoid disruption to customers.