In this guide, our head of insolvency & restructuring, Tim Francis, explains the pre-pack administration process and how it works.
Introduction to pre-pack administrations
A pre-pack administration is a formal insolvency process in which the sale of a business and its assets is arranged before administrators are appointed, with the sale completing immediately on their appointment. It allows a viable business to continue operating while the old company’s debts are dealt with in administration. This guide explains how pre-packs work in England and Wales and how the process affects directors, employees, creditors and the future of the business.
Pre-packs – at a glance
A pre-pack administration involves negotiating a sale of the business in advance and completing it as soon as administrators are appointed. It preserves value, protects jobs and allows trading continuity where the company is struggling but the underlying business remains viable.
Francis Wilks & Jones has a team of lawyers who have been doing this work for over 20 years. It is headed by Tim Francis, one of the country’s leading pre pack lawyers with more than 30 years experience helping businesses in financially difficult situations. We offer free consultations to all new clients.
What is a pre-pack administration?
A pre-pack administration is a rescue mechanism under the Insolvency Act 1986 in which a sale of the business is agreed before administrators take office. Once appointed, the administrators complete the sale immediately. This avoids the disruption and cost of trading in administration and helps maintain the value of the business.
- Directors often choose a pre-pack because it offers speed, stability and a greater chance of saving jobs.
- It is particularly useful when trading losses are increasing or when uncertainty would otherwise damage confidence among customers, suppliers and staff.
A pre-pack differs from standard administrations because the sale is not negotiated after the administrators are appointed. The terms are agreed beforehand, allowing an immediate and smoother transition to the purchaser.
In summary, a pre-pack is a structured rescue mechanism allowing a business to be sold immediately on appointment of administrators.
When is a pre-pack administration appropriate for a struggling business?
A pre-pack may be appropriate where the business is sound but the company has become insolvent or cannot meet its debts when due. Common examples include loss of a key contract, increased creditor pressure, HM Revenue & Customs enforcement, or the insolvency of a major customer.
- Directors may notice early warning signs such as cash flow shortfalls, arrears in PAYE or VAT, persistent creditor demands or threatened HMRC winding up petitions or claims by other creditors.
- Seeking advice early helps preserve the widest range of restructuring options.
Pre-packs are not suitable where the underlying business is no longer viable. If there is no buyer interest, or if trading losses have eroded the core business, a different process such as liquidation or a Company Voluntary Arrangement may be more appropriate. Early assessment is essential.
One important issue to bear in mind is that a pre-pack is only viable when the underlying business is sound and value can be preserved.
We work with experts in the restructuring world who can help assess the viability of the business and together see how we can help save the company.
How does the pre-pack administration process work step by step?
The pre-pack process is regulated and follows a defined sequence. The steps below reflect common practice and incorporate the detailed insights provided by our partners.
- Early assessment of viability. The directors take professional advice to assess whether the underlying business is viable and capable of rescue. This includes reviewing cash flow, creditor pressure, contracts and the likelihood of enforcement action such as a winding up petition. This is where our expert insolvency team can help. And together with our insolvency practitioner contacts we have built up over 25 years, we can help put the right team together for you.
- Appointment of a proposed administrator. An insolvency practitioner is engaged as the proposed administrator. If no winding up petition has been issued, an out of court appointment is usually available. If a petition is already in place, a court application will be required. We know the best insolvency practitioners in the industry who would be suitable for the type and size of your business. We have a fantastic network of trusted insolvency practitioners we have built up over the last 25 years of trading.
- Independent valuation of the business and assets. The proposed administrator instructs an independent agent to value the business and assets of the company. This usually includes both going concern and break-up valuations to demonstrate that the proposed sale represents the best available outcome for creditors.
- Accelerated marketing of the business. The business and assets of the company (i.e not than the shares in the company) are marketed on an accelerated basis to test the open market and identify potential buyers. This step is essential to evidence transparency and justify the sale price, particularly where a connected party may be involved.
- Identification of the preferred purchaser. Offers are reviewed by the proposed administrator, who identifies the bid that best serves the interests of creditors as a whole. The purchaser may be a third party or a new company formed by the existing management.
- Preparation of the sale documentation. The terms of the sale are agreed in principle and documented. This includes heads of terms and a detailed sale and purchase agreement setting out which assets will transfer, which liabilities will remain with the old company, and how consideration will be paid.
- Independent evaluator’s report where required. If the sale is to a connected party, the purchaser must obtain an independent evaluator’s report under the Administration (Restrictions on Disposal etc.) Regulations 2021. The report is provided to the administrator before completion.
- Formal appointment of administrators. Once all documentation is ready, the administrators are formally appointed over the company, either through an out of court filing or by court order. Timing is critical to ensure the sale can complete immediately.
- Completion of the pre-pack sale. The sale completes immediately on or shortly after the administrators’ appointment. The business and assets transfer to the purchaser, allowing trading to continue with minimal disruption.
- Administration of the old company. The old company remains in administration. The administrators deal with creditor claims, proceeds of sale of the business and assets, realise any remaining assets, and make distributions in accordance with insolvency law.
How is a proposed administrator appointed?
The directors or a qualifying floating charge holder will usually appoint an insolvency practitioner to act as the proposed administrator. If no winding up petition has been presented, the company can use the out of court appointment route. This requires filing documents at court but does not involve a hearing.
- If a winding up petition has already been issued, the directors cannot use the out of court route.
- Appointment must be made by a court order following an application supported by evidence.
- Timing becomes critical and urgent legal advice is often needed.
- Our team advises directors on the appropriate route and manages risks associated with existing creditor action.
The route to appointment depends on whether a winding up petition exists and may require court involvement. But either way, we can help you through this process and ensure a trusted Administrator is appointed.
How is the business valued before a pre-pack?
The proposed administrator instructs an independent agent to value the business and compare its worth as a going concern against its break-up value. These valuations must be objective and are required to demonstrate that the proposed sale achieves the best available outcome for creditors.
Valuation evidence supports the administrator’s obligations under SIP 16, which demands transparency on how the sale price has been justified. An independent valuation is essential to justify the sale price and demonstrate compliance with regulatory requirements.
What is accelerated marketing and why is it required?
The proposed administrator is expected to carry out accelerated marketing before appointment. This tests the open market and ensures that the best available price has been achieved. Marketing periods may be short, particularly where value is deteriorating or contracts risk being lost.
- Marketing records, including enquiries and offers, must be retained.
- These allow the administrator to explain why the chosen offer represents the best available outcome for creditors.
Directors should not lead the marketing process. They must allow the insolvency practitioner to manage it independently to avoid conflicts of interest.
Accelerated marketing helps demonstrate that the business has been exposed fairly to the market and that value has been maximised.
How is Newco set up and how does it participate in the sale?
If the existing management wishes to buy the business, they may set up a new company to act as the purchaser. Newco must be properly incorporated, funded and ready to complete the purchase on the day of administration.
Directors must act carefully during this phase. They owe duties to the company and its creditors and must manage potential conflicts. We advise directors on how to balance these responsibilities, avoid criticism and keep clear records of decision making. Alternatively you can read our free Directors Duties guide which will help explain director duties in this difficult stage.
What happens when the terms of sale are agreed?
Once valuations and marketing have been completed and a preferred offer identified, the parties negotiate heads of terms and move to a formal sale and purchase agreement. This sets out which assets will transfer, which liabilities will remain with the old company and how consideration will be paid.
When all documents are ready, the administrators are appointed and the sale completes immediately. This ensures minimal disruption and protects the continuity of trading.
It is important to understand that the sale terms are agreed in advance and completion takes place immediately when administrators are appointed.
What special rules apply to connected-party pre-pack sales?
Since 2021, additional requirements apply when the purchaser is connected to the company, such as former directors or shareholders. Under the Administration (Restrictions on Disposal etc.) Regulations, the buyer must obtain an independent evaluator’s report assessing whether the sale price and proposed terms are reasonable.
- The evaluator’s role is not to approve or reject the transaction but to provide an independent opinion.
- Administrators must consider the report carefully and may decide not to proceed if concerns are raised.
- Directors must ensure that all requested financial information is provided to the evaluator promptly and accurately.
Connected-party pre-packs require strict procedural compliance and transparent justification. Our expert team will help ensure full compliance.
How do directors’ duties and risks affect a pre-pack decision?
Directors must comply with their duties under the Companies Act 2006. When a company is close to insolvency, those duties shift towards protecting the interests of creditors. Decisions must be made carefully, documented properly and informed by professional advice.
Risks include:
- allegations of misfeasance if directors act improperly,
- scrutiny of overdrawn director loan accounts,
- challenges to transactions at an undervalue,
- creditor dissatisfaction if the sale is not well justified, and
- potential director disqualification investigations.
We help directors assess these risks, document their decisions, and comply with both statutory duties and insolvency legislation.
Directors should take early advice, record all key decisions and ensure that creditor interests are protected. It is much better to be prepared and avoid the likelihood of personal claims later down the line.
What happens to employees, contracts and assets in a pre-pack?
Operational considerations are key to the success of a pre-pack. Purchasers must understand what transfers automatically and what requires additional negotiation.
What happens to employees under TUPE?
In most cases, the Transfer of Undertakings (Protection of Employment) Regulations apply. Employees assigned to the business transfer automatically to the purchaser on their existing terms. Certain liabilities may remain with the old company, but many employment obligations transfer to the new employer.
Consultation obligations may also arise. Early planning helps avoid disputes and reduces uncertainty for staff. TUPE usually applies, meaning employment rights transfer automatically to the purchaser.
What happens to commercial contracts?
Some contracts transfer with the consent of the counterparty. Others may prohibit assignment or require renegotiation. Landlord consent is frequently required for lease transfers, and finance and asset hire agreements may need separate arrangements.
Directors and purchasers should review terms early to identify potential barriers to continuity. Contract transfers depend on the terms of each agreement and may require negotiation or consent.
What assets normally transfer to the purchaser?
A pre-pack sale commonly includes physical assets, stock, intellectual property, customer lists and goodwill. Work in progress and ongoing orders may also transfer if permitted by contract. The sale and purchase agreement determines precisely what is included.
Assets transfer according to the agreed terms, allowing the purchaser to acquire only what is required for future trading.
What happens to the debts and liabilities of the old company after a pre-pack?
After administrators are appointed, the old company remains responsible for its debts.
- Administrators gather in assets and distribute funds to creditors according to the statutory priority regime.
- Secured creditors are paid from the realisation of their security.
- Certain HMRC debts are treated as secondary preferential claims. Unsecured creditors receive distributions if surplus funds remain.
The purchaser does not take on historic debts unless specifically agreed. The old company remains liable for its debts, with the administrator responsible for distributions.
How does a pre-pack administration affect directors personally?
Directors may still face personal exposure where they have given personal guarantees or have an overdrawn director loan account. Administrators may review transactions involving directors to ensure that creditors have not been disadvantaged.
There is also a possibility of investigations into director conduct. We advise directors on managing these risks and ensuring compliance throughout the process.
A well planned pre-pack can reduce director exposure, but personal risks must be assessed and managed.
If you do find yourself facing a claim by a liquidator or administrator, we have a specialist defence team who can help. We have helped defend 100’s of directors over the last 25 years and avoid personal claims against them.
How does a pre-pack compare to alternatives such as liquidation or a CVA?
A pre-pack offers continuity and the potential to preserve value. A CVA may be more suitable when the company can continue trading while compromising with creditors. Liquidation becomes necessary where the business cannot be rescued or where no purchaser exists. In some situations, a trading administration followed by an open market sale is more appropriate than a pre-pack.
Choosing the correct process requires careful assessment of viability, creditor pressure and commercial reality. A pre-pack is one of several restructuring options and must be chosen based on the circumstances of the business.
How can FWJ support directors considering a pre-pack administration?
Our specialist company rescue team provides independent advice on whether a pre-pack is appropriate, help directors understand their duties and work with insolvency practitioners to ensure compliance at every stage. Our support includes:
- assessing director duties and risks,
- advising on administrator selection,
- preparing for creditor scrutiny,
- addressing director loan account and personal guarantee issues,
- co-ordinating with insolvency practitioners on documentation and timing, and
- managing urgent situations where a winding up petition has already been presented.
If you need specialist advice on the pre-pack process, our team is here to help. Alternatively, if the matter is urgent, call our Tim Francis today for a free consultation.
