A pre-pack administration uk is the process whereby the business and assets of an insolvent company are sold by a licensed insolvency practitioner (IP) in an arrangement that has been negotiated in advance. The sale is usually combined with a novation of debt claims from the insolvent company to the purchaser and this gives rise to what is commonly referred to as a ‘credit bid’, thereby allowing the administrator to maximise realisations for creditors.
Despite being widely used, pre-pack sales have been criticised for their lack of transparency and the fact that they can be completed without the knowledge and approval of unsecured creditors. Following an extensive consultation, new reforms to Statement of Insolvency Practice (SIP 16) came into force at the end of April 2021 that aim to increase creditor confidence by requiring either creditor approval or a report from an independent third-party evaluator to be obtained when a substantial disposal is made to a person connected with the insolvent company.
In the majority of cases, the pre-pack is undertaken by the insolvent company’s current directors, who will often form a new company, or ‘newco’ for this purpose. This is to avoid the stigma of the liquidation route and to ensure that the TUPE protections afforded employees can be honoured. A pre-pack can be an effective route for a business that is facing serious financial pressure, such as when a winding up petition has been issued or when a key supplier, customer or financier withdraws support. However, it is not the only route and, in many situations, a company voluntary arrangement (CVA) or creditors’ voluntary liquidation (CVL) may be more suitable.