In a prepack administration, a financially distressed company employs an insolvency practitioner to ready its assets and business for a sale to take place, as soon as reasonably practical after it enters formal insolvency.
The term prepack comes from the view that the sale is a closed process, so that by the time creditors are made aware of the sale, it has already taken place.
Although prepack administration can be a valuable tool, here we look at 3 reasons why placing your company into pre-pack administration may not be a good idea.
- Transfer of employee rights (TUPE)
It is highly likely that if you prepack your company using the administration process, the new company will be held liable for all employee rights accrued in the old company. This can be a heavy burden for a new entity, and could possibly have been avoided if the company had utilised the liquidation procedure instead.
- It is more expensive
The prepack process has become heavily regulated over the last 15 years. Much of the regulation is helpful, and protects stakeholders interests. However, if you are a small company owner, some of it is overkill, and it usually makes the process more expensive than liquidation.
- Prepack antagonises creditors
Prepack is by nature a closed process, which has fostered negative connotations with creditors. In our experience, creditors are more likely to react combatively when faced with a prepack as opposed to liquidation, which is more inclusive to creditors, but can achieve the same end goal..
Our prepack advice
The prepack administration procedure has a place, but usually isn’t the best option for smaller owner-managed businesses. In such cases, we find that liquidation is a less expensive, more transparent procedure, that if done correctly affords all the usual protections, whilst potentially also avoiding the added cost of a TUPE transfer.
For further advice, see some of our liquidation articles at Business Rescue Expert