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Pre pack administration is a procedure where an insolvent company has already organised for the company to be bought as soon as it goes into administration. As soon as the Administrator is appointed, he or she will then immediately put through the sale of the company. The creditors do not have to be involved in this procedure in any way.

Often, the purchaser of the company will be the directors themselves in the guise of a new company which has been formed solely for the purpose of purchasing the first. This may seem like ‘cheating,’ but actually pre pack administration is fully endorsed by the government. When the company is purchased, the proceeds of the sale are used to pay back the creditors as much as possible, so they do not lose out in any way. This is all they would have received if they company had been liquidated anyway.

The directors, meanwhile, are allowed to run the business as normal throughout this procedure. Staff and supplier contracts can be retained, while any onerous supplier contracts or unwanted leases and employment contracts can be ended. This allows the business to effectively restructure itself to ensure its continued survival. The very fact that it had become insolvent shows that it needs to be restructured in order to continue, and to become profitable.

While it may seem somewhat like a ‘cheat’ or a way to escape debt, pre pack administration is actually a perfectly legal and valid manoeuvre that is beneficial for both the directors and the creditors. Unfortunately, however, the public does have quite a negative perception of the move, and there can often be a public and media outcry when it is utilised. Generally, however, this is because the public are unaware of what pre pack administration really involves.

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