Pre-pack administration

What is a pre-pack administration?

A pre-pack administration is a form of company administration in which the sale of the business and its assets is negotiated before a licensed insolvency practitioner is appointed as administrator, and completed immediately afterwards. The buyer is often a new company, sometimes formed by the existing directors, and the deal is agreed in advance so trading barely pauses.

It is called a pre-pack because the sale is pre-packaged, arranged and ready to complete the moment the administrator takes office under the Insolvency Act 1986. A pre-pack sits within the wider law of company administration and is one of the routes used to rescue a viable business, saving the trade and jobs even when the old company cannot survive its debts.

Why do companies use a pre-pack administration?

Companies use a pre-pack administration to preserve the value of a business that would be lost in a slow, public insolvency, because it keeps the trade running, retains customers and staff, and transfers the goodwill to a buyer as a going concern rather than breaking the company up. Speed is what protects the value.

The reasons a pre-pack is chosen over a standard closure are usually these.

• Continuity of trading. The business carries on with little or no interruption, so contracts, customers and cash flow survive the transfer.
• Preserving value and goodwill. A business sold as a going concern is worth far more than the same assets sold off piecemeal in a liquidation.
• Protecting jobs. Employees usually transfer to the buyer under the TUPE regulations, so a pre-pack can save jobs that a shutdown would end.
• Continuity for suppliers and customers. Orders are fulfilled and supply relationships continue, which supports the value being rescued.
• Speed and confidentiality. The sale is agreed before appointment, which limits the damage that a drawn-out, public insolvency does to a trading business.

Is a pre-pack administration the same as a pre-pack liquidation?

A pre-pack administration is not the same as a "pre-pack liquidation", because a pre-pack is a form of administration, not liquidation, and there is no formal procedure in England and Wales actually called a pre-pack liquidation. People searching for one usually mean a pre-pack administration, or they are confusing it with selling a business before a creditors' voluntary liquidation.

The distinction matters because the aim is opposite. A pre-pack administration rescues and continues the business through a sale, whereas a liquidation closes the company down and realises its assets for creditors. If you have been told your company needs a "pre-pack liquidation", the right first step is to check which procedure actually fits, and we will tell you.

How does a pre-pack administration work?

A pre-pack administration works by arranging the sale in advance and then completing it the instant the administrator is appointed, so the business moves to the buyer in a single step. The insolvency practitioner values and markets the business, agrees terms with the buyer, and only then takes office to sign the sale off.

The main stages are as follows.

• Independent valuation. The business and its assets are valued independently so the sale price can be shown to be fair to creditors.
• Marketing the business. The business is marketed to test the market and evidence that the agreed price is the best reasonably available.
• Negotiating the sale. Terms are agreed with the buyer, which may be a third party or a new company formed by the existing directors.
• Appointment of the administrator. A licensed insolvency practitioner is appointed as administrator, which triggers the statutory moratorium that protects the company.
• Completion and reporting. The sale completes immediately, and the administrator later reports the full details to creditors under Statement of Insolvency Practice 16.

What is SIP 16, and how does a pre-pack administration protect creditors?

Statement of Insolvency Practice 16 (SIP 16) is the professional standard that requires the administrator to disclose the details of a pre-pack sale to creditors, explaining what was sold, to whom, for how much, and why a pre-pack served creditors better than the alternatives. It is the main transparency safeguard on a pre-pack administration.

The disclosure exists because the sale happens before creditors are consulted, so the administrator must justify it afterwards. Four things a SIP 16 statement covers give creditors the picture.

• The marketing of the business. How and for how long the business was marketed, so creditors can see the sale was tested.
• The valuations obtained. The independent valuations that support the price paid for the assets.
• The identity of the buyer. Who bought the business, and whether they are a connected party such as a director.
• The rationale. Why the administrator concluded a pre-pack produced a better result for creditors than a standard administration or a liquidation.

What happens in a connected-party sale, and what is the Pre-Pack Pool?

A connected-party sale is a pre-pack in which the buyer is linked to the insolvent company, most often its own directors, and since 2021 a substantial sale to a connected party in the first eight weeks of administration needs either the creditors' approval or an independent written opinion, known as an evaluator's report. This is the strongest safeguard against a director simply buying the business back debt-free.

Two named safeguards apply to a connected-party pre-pack.

• The evaluator's report. Under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, an independent evaluator gives a written opinion on whether the connected-party sale is reasonable before it can proceed without creditor approval.
• The Pre-Pack Pool. The Pre-Pack Pool is a voluntary, independent body a connected buyer can approach for an opinion on the proposed purchase, adding a further layer of scrutiny that reassures creditors.

What are the criticisms of a pre-pack administration, and what safeguards apply?

The main criticism of a pre-pack administration is that the same directors can buy the business back free of its old debts while unsecured creditors recover little, which can look unfair even when it is lawful and produces the best available outcome. The safeguards exist precisely to test that the sale was fair and properly evidenced.

We think it is fairer to a director to set out both sides honestly.

• The concern. Unsecured creditors can be left worse off while the business continues under familiar ownership, so a pre-pack must be able to withstand scrutiny.
• SIP 16 transparency. The administrator must justify the sale to creditors in a SIP 16 statement, as set out above.
• The 2021 connected-party rule. An evaluator's report or creditor approval is required for a substantial connected-party sale, which is a real check on directors buying back cheaply.
• The administrator's duty. The administrator is a licensed insolvency practitioner who owes duties to creditors and must be able to show the pre-pack gave them a better result than winding the company up.

How much does a pre-pack administration cost?

A pre-pack administration typically costs from around £10,000 to £30,000 plus VAT in administrator's fees for a smaller business, and often more, with the figure depending on the size of the company, the complexity of the sale and the work needed to evidence it. These are indicative ranges to confirm at a free consultation, not fixed prices, because every case is different.

Separately from the fees, the buyer pays a fair market value for the business and assets, supported by the independent valuation, and that money goes to the company for the benefit of creditors. The administrator's costs are usually met from the sale proceeds or funded by the purchaser, so they do not normally fall on the directors personally.

Figures are indicative and confirmed in writing before you commit. Ask us for a realistic estimate for your business.

How does a pre-pack administration compare with a normal administration and with liquidation?

A pre-pack administration differs from a standard administration in timing and from a liquidation in purpose: a pre-pack completes the sale at appointment, a standard administration markets and sells the business while it is in administration, and a liquidation closes the company rather than continuing the business at all. The right choice depends on whether the business can and should keep trading.

See our fuller liquidation versus administration comparison, or call us and we will tell you which fits your company.

Why choose NTF for a pre-pack administration?

NTF Corporate Solutions is a boutique insolvency practice whose administrations are carried out by named practitioners, James Kaye and Nick Morgan, who are licensed by the Institute of Chartered Accountants in England and Wales and can be appointed as administrator. You deal with an experienced, named practitioner who can act as administrator, from the first call to completion.

We have advised company directors since 2009, we explain the process and the safeguards in plain English, and the first conversation is free, confidential and without obligation. If a pre-pack could save your business, we will tell you honestly whether it fits and how it would be evidenced.