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Disadvantages of a pre-pack administration

April 12, 2016 | Financial Saviour

Back in February we looked at the advantages of entering into a pre-pack administration as a method of recovering an insolvent business, but there are some drawbacks to this particular procedure that we’ll delve into here.

Maintaining brand image and allowing directors to keep at least some element of control over the struggling business are just two ways that a pre-pack administration helps facilitate the quick sale of a struggling business, but what about the costs? And are there ethical concerns?

Here are a few issues that we’ve identified as potential disadvantages with pre-pack administrations:

Cost to find funds

In order to buy the assets of the failing business, directors must first find the necessary funds. Not only can this take a great deal of time, but due to the responsibility of administrators to ensure that assets are not undervalued, it can sometimes be the case that it becomes a significant financial undertaking for directors to access the required funds.

An administrator must sell the assets at a fair market value.

No change in employee rights

Potentially not good news for the new company. Pre-pack administrations are governed by the Transfer of Undertakings (Protection of Employment) (TUPE) legislation which applies to organisations of all sizes to protect employees’ rights, contracts and jobs when the organisation they work for transfers to a new employer.

Contracts

From the outset this can mean huge liability for the new company as well as significant monthly expenditure in terms of wages and other employment costs.

Ethical issues

Because debts are written off, a pre-pack administration is often perceived as unethical. However, knowledge of the business becoming insolvent being made public can also be a huge disadvantage; there may be a loss of trust from customers and suppliers alike, particularly when negotiating contracts, and it can be especially difficult to obtain credit from suppliers.

All of this can result in a loss of trade as a result of the bad publicity.

Investigating directors’ conduct

When all business assets have successfully been sold, the old company will be liquidated. As part of this procedure, a report is put together for the Department of Business, Innovation and Skills, outlining the conduct of the company directors in the run up to the insolvency.

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Directors are still open to investigation even if they have formed a new company since the liquidation and can also be prosecuted if findings from the investigation report their conduct to be improper. In some cases where the director is under investigation, the new company may be required to pay a bond before they can register for VAT and recommence business.

For more information on pre-pack administrations for an insolvent business, get in touch with Financial Saviour. We are a team of experienced insolvency practitioners specialising in corporate recovery and financial restructuring who understand all the concerns that come with a struggling business. Fill out our enquiry form today.

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