Pre-pack administration will require the old company’s directors or shareholders to get advice on setting up a new company, getting a reasonable valuation for the assets of the old business and drawing up a sale and purchase agreement. They will also need to find the right insolvency practitioner to administrate the process and liquidate the old company. 

Given that one of one of the drivers of pre-pack administration is the quick sale of assets to ensure that the best price is achieved for the creditors, the process of pre pack administration can happen within a few days.

The main steps which need to be undertaken to achieve this process are highlighted below. Note, some of these steps may be undertaken simultaneously:

Step 1: Incorporation of a new company

There needs to be a vehicle which can be used to purchase the assets of the failing business. As such, a new company must be registered. The directors of the new company can be the same as those of the old business, totally new directors or a mixture of the two.

HMRC VAT Security Deposit
If any of the directors of the new business are the same as the old, it is important to note that HM Revenue and Customs have the power to request a security deposit before they will grant a VAT license to a new company.

This situation may occur where the directors of the old business are known by HMRC to have failed to pay VAT or company taxes in the past. Where this could be the case, a budget needs to be set aside to pay a security deposit if required. The deposit could be the equivalent to between 4-6 months of the old company’s VAT liability.

Step 2: Appoint Administrator and advertise Administration

The directors or shareholders of the company appoint an insolvency practitioner. If in agreement that this is the best course of action, the insolvency practitioner will apply to the court for an administration order.

Once the administration order is granted, the company is known as being in Administration and the insolvency practitioner is appointed as the administrator. Notice that the company has entered into administration is given to all of its creditors and advertised in the London gazette.

Step 3: Company Assets Valued and Sale & Purchase Agreed

The administrator will arrange for a valuation of the assets of the old company so that a realistic and fair market price can be established.

It is very important to understand that an administrator is acting for the benefit of the old company’s creditors, not shareholders or directors. Once appointed, they must ensure that the best price is obtained for the assets.

Once the terms of the sale are agreed, the transaction can go ahead. It is not necessary to involve the failing business’s creditors with this negotiation or gain their approval.

The purchase price of the old company’s assets can be paid in a lump sum or if agreed by the administrator, in installments over a period of time.  

Step 4: Transfer of Leases and/or Freehold Property

If the new company wishes to remain in the premises which had been leased by the old business, appropriate agreement will have to be made with the landlord to transfer the lease. This transfer will depend on whether agreeable terms can be negotiated with the landlord. If not, the new phoenix company may decide to move to property elsewhere.

The phoenix company could be granted a license by the Administrator to occupy the old leasehold premises until a new agreement is signed with the landlord if this is required by the new business.

If the old company owed any freehold property, this may be sold as part of the pre-pack agreement or to a 3rd party buyer. The phoenix company may occupy a freehold property under license from the Administrator until the premises are sold.

Step 5: Transfer of Employees

All employees who’s positions are retained in the new business and their accumulated rights such as holidays, redundancy entitlement etc. must be transferred to the phoenix company under TUPE (Transfer of Undertakings) law. It is not an option to choose to make such employees redundant.

Step 6: Report to creditors and liquidation of old company

The Administrator must make a detailed report to the creditors of the old business as to why the pre-pack sale was undertaken and was to their benefit.

The proceeds of the sale are then distributed to the old company’s creditors and the old company is normally liquidated by the administrator.

The administrator will write to any debtors that are not purchased by the new phoenix company as an asset requesting payment of the outstanding amount.