Understanding Pre-Pack Administration
A fast-track administration process that can preserve business value and save jobs. Expert insight into when pre-packs work, their benefits, and potential pitfalls.
Discuss Your OptionsPre-Pack Administration: The Essentials
Speed & Continuity
Sale agreed before administration, completing immediately upon appointment
Value Preservation
Protects business value, jobs, and customer relationships
Creditor Focus
Must achieve better returns than liquidation alternative
Transparency Required
Strict disclosure and justification standards apply
Key insight: Pre-pack administration can be a powerful rescue tool when used appropriately, but requires careful planning, transparent process, and experienced professional guidance.
Three Statutory Purposes of Administration
Under the Insolvency Act 1986 (as amended), a company can only enter administration if the administrator can reasonably achieve one of these three statutory objectives:
Rescue as Going Concern
Rescuing the company as a going concern - preserving the business, jobs, and value for all stakeholders
Better Creditor Returns
Achieving a better result for creditors than would be possible if the company were wound up without first being in administration
Realise Property
Realising property to make a distribution to one or more secured or preferential creditors
The administrator must pursue the first objective unless it is not reasonably practicable, or the second objective would achieve a better result for creditors as a whole. The third objective can only be pursued if the first two are not achievable and it does not unnecessarily harm the interests of creditors.
What is Pre-Pack Administration?
A pre-pack is an arrangement where the sale of business assets is negotiated and agreed before administrators are formally appointed, with completion occurring immediately afterward.
How Pre-Packs Differ
Standard Administration
Administrator appointed first, then markets business for sale over time
Pre-Pack Administration
Sale negotiated before appointment, completes immediately upon administration
Critical difference: The speed of a pre-pack preserves business value by maintaining operations without disruption, protecting jobs and customer confidence.
Why Speed Matters
When insolvency becomes public knowledge:
Customer Confidence Lost
Orders cancelled, contracts withdrawn
Key Staff Depart
Experienced employees seek stable employment
Value Rapidly Erodes
Business worth significantly reduced, creditor returns diminished
Who Can Buy Through Pre-Pack Administration?
The appointed insolvency practitioner selects the most appropriate buyer for the business assets, ensuring the best outcome for creditors while maintaining transparency throughout the process.
Third Party Buyers
External companies or investors looking to acquire business assets to expand existing operations or enter new markets
Directors via Newco
Existing directors purchasing assets through a newly formed company, subject to strict independent evaluation requirements since 2021
Connected Parties
Shareholders, associates, or related entities who must comply with additional transparency and disclosure obligations
The IP's Role in Buyer Selection
The insolvency practitioner has a duty to select the buyer who offers the best outcome for creditors. This may not always be the highest offer - factors such as certainty of completion, speed, and ability to preserve jobs are also considered. All buyer relationships and any connections to the insolvent company must be fully disclosed under SIP 16 requirements.
Benefits and Considerations
Key Benefits
Business Continuity
Operations continue without interruption, preserving going concern value
Job Protection
Employees retained, avoiding redundancy and preserving skills
Supplier Relationships
Continuity increases likelihood of suppliers being paid under new ownership
Better Creditor Returns
Preserved value means improved recovery for creditors
Common Criticisms
Lack of Transparency
Process can appear secretive to creditors and stakeholders
Limited Marketing
Sale arranged before open market testing of asset values
Director Involvement
Concerns when existing directors buy business through new company
Creditor Concerns
Perception that creditors may not receive fair treatment
The Pre-Pack Process
Understanding the steps involved in a pre-pack administration
Initial Assessment
Company contacts licensed insolvency practitioner. Assessment of position and available options conducted.
Asset Valuation & Preparation
Independent professional valuation of company assets determines fair market value. IP prepares Statement of Affairs and identifies potential buyers. Assets must be valued highly enough to satisfy secured creditors.
Sale Negotiation
Terms agreed with buyer. If newco, viability forecasts prepared and funding arranged.
Independent Evaluation
Since 2021, mandatory independent evaluator reviews transaction within 48 hours (for connected party sales).
Administration & Sale
Company enters administration. Sale completes immediately, suspending creditor actions.
Creditor Meeting & Distribution
Administrator explains decision to creditors. Sale proceeds distributed pro-rata.
Legal Framework & Regulations
Pre-pack administration operates within a robust regulatory framework designed to protect creditors while enabling legitimate business rescue.
Enterprise Act 2002
The Enterprise Act 2002 reformed UK insolvency law, making it legal for an administrator to be appointed without reference to the courts. This streamlined process enables faster business rescue through out-of-court appointments.
- Administrator must be a licensed insolvency practitioner
- Appointment can be made by company, directors, or qualifying floating charge holder
- Bound by Statements of Insolvency Practice (SIPs)
SIP 16 Requirements
Statement of Insolvency Practice 16, introduced in 2009, sets transparency and disclosure standards for pre-pack sales. It ensures creditors receive full information about the transaction.
- Full history of decision-making process
- Relationship between IP and directors prior to administration
- Justification for why pre-pack was chosen over alternatives
- Identity of buyer and any connections to insolvent company
Phoenix Companies & Connected Party Sales
What is a Phoenix Company?
A phoenix company is a new entity that continues similar business activities to an insolvent company, often operated by the same directors or shareholders. While legitimate in many cases, this has historically raised concerns about fairness to creditors.
The term "phoenix" refers to the business rising from the ashes of the old company. When properly conducted, this preserves jobs and business value that would otherwise be lost.
2021 Connected Party Reforms
Since 30 April 2021, connected party sales (including phoenix scenarios) require mandatory independent evaluation under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021.
- Evaluator must review transaction within 48 hours
- Must provide opinion on whether sale should proceed
- Evaluator must be independent of both buyer and seller
Administrator's Duty of Care
Throughout the pre-pack process, the administrator must act in the best interests of creditors as a whole. They must be able to demonstrate that the pre-pack achieves better returns than would be achieved through liquidation or standard administration marketing. Transparency is paramount - K2 helps ensure your pre-pack process meets all regulatory requirements and withstands scrutiny.
When is Pre-Pack Appropriate?
Viable Core Business
Fundamentally sound business facing temporary cash flow crisis, not long-term structural problems
Time-Critical Situation
Business value eroding rapidly, insufficient time for standard administration marketing process
Identified Buyer
At least one credible buyer ready to proceed, whether third party or directors via newco
Essential Criteria
Creditor Benefit
Must demonstrate better returns than liquidation alternative
Adequate Security
Assets valued highly enough to cover secured creditor claims
When Pre-Pack Isn't The Right Solution
Pre-pack administration may not be possible or appropriate in all cases. Your insolvency practitioner will discuss more suitable alternatives based on your company's specific circumstances.
Company Voluntary Arrangement (CVA)
A formal agreement with creditors to repay debts over time while continuing to trade. Suitable when the business is viable but needs breathing space to restructure.
Learn about CVAsCreditors' Voluntary Liquidation (CVL)
A formal process to close an insolvent company, realise assets, and distribute proceeds to creditors. Appropriate when the business cannot be saved or has no viable future.
Directors initiate with shareholder approvalStandard Administration
Administrator appointed first, then markets the business for sale over time. Better when there's time to test the market and potentially achieve a higher sale price.
Allows broader marketing periodNeed help deciding? K2 can assess your situation and recommend the most appropriate route based on your company's financial position, creditor pressure, and business viability.
Discuss Your OptionsExpert Pre-Pack Support from K2
K2 provides strategic advice and hands-on support throughout the pre-pack process
How We Help
Initial Assessment
Evaluate whether pre-pack is the right option for your situation
Asset Valuation Coordination
Arrange independent professional valuations to determine fair market value and satisfy regulatory requirements
Process Management
Coordinate with IPs, buyers, and stakeholders throughout
Business Planning
Develop robust forecasts and viability assessments for newco
Post-Sale Support
Help implement recovery strategy in the new structure
Why Choose K2
Practical Approach
We combine technical expertise with hands-on implementation support, ensuring the new business structure delivers real value.
Frequently Asked Questions
Is a pre-pack the same as phoenixing?
Not necessarily. While phoenix companies can be created through pre-packs, the two concepts are distinct. A pre-pack is the process; a phoenix is one possible outcome. Legitimate phoenix companies must comply with strict regulations including independent evaluation since 2021.
How long does a pre-pack take?
The preparation phase varies, but once the administrator is appointed, the sale completes immediately or within hours. The key advantage is this speed, which preserves business value and prevents erosion of goodwill and customer relationships.
Can directors buy their own business through a pre-pack?
Yes, but with strict safeguards. Since 2021, connected party sales require mandatory independent evaluation within 48 hours. The evaluator must confirm the sale represents fair value and is in creditors' best interests before it can proceed.
What happens to employees in a pre-pack?
One major benefit of pre-packs is job preservation. Employment typically transfers to the buyer under TUPE regulations, maintaining continuity. This is significantly better than liquidation where most jobs are lost immediately.
Are pre-packs legal and ethical?
Yes, when conducted properly. Pre-packs are a legitimate insolvency tool governed by the Enterprise Act 2002 and Statement of Insolvency Practice 16. They must demonstrate better creditor returns than alternatives and comply with strict transparency and disclosure requirements.
Explore Your Pre-Pack Options
If your business is facing financial pressure, K2 can help you understand whether pre-pack administration could preserve value and protect jobs while delivering fair returns to creditors.
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