The first a creditor often hears of an administration is an announcement in the press. That is even more so when the infamous "pre-pack" is involved. This blog will cover exactly what everyone is talking about when they mention pre-packs.

At the end of this note you will be able to answer the following multiple choice question. Is a pre-pack in an administration:

(a) A quick, fair and logical way to save a business from completely failing?

(b) A stitch-up between a tame accountant and the directors in order to keep the assets and leave behind the debt and any unwanted properties?

(c) A process with minimum control over what happens and how much it costs?

(d) All of the above?

As mentioned in my last blog, administration is now the norm for dealing with an insolvent company. It should produce a controlled process which benefits all unsecured creditors rather than just those who are quicker off the mark.

Arguably however, the merest hint of administration will mean that the business caused problems which will result in a worse outcome than otherwise possible. The creditors will scramble to secure their position; key employees may decide to jump ship; landlords may attempt to forfeit leases or distrain on the goods on the premises; customers may decide to shop elsewhere for whatever product or services the company provides.

Instead, an insolvency practitioner is approached either by the company or is recommended by the bankers of the company to be ready to take the role of administrator and then immediately (i.e. same day) sell the desired assets to a new entity set up and controlled by the directors and/or shareholders of the failed company. Behind the scenes there will be pre-preparation of documentation so that the process can happen without any gap or external publicity.

Typically in a retail operation an appointment will be made on a Friday, the disposal sanctioned by a court order which is sought by the newly appointed administrator and then completed. The Monday morning news breaks and the new entity can say that the business has been saved and is continuing to operate on new capitalisation and can fulfil all the old company's ongoing (but not previous) commitments.

So when first the creditors hear of the appointment it is also to hear that all the assets have been disposed of and a new entity put in place to deal with the various parties who will have an ongoing future relationship, an obvious class being the landlords of the failed company's leases.

In my next blog, I will discuss how a property owner, typically a landlord, would then deal with the new reality presented to it in a pre-pack by the administrator and the new operating business. Usually they will either be presented with the possibility of a new tenant in occupation or an empty unit.

Anyone interested in the morality of the process can find information and discussion on the web from the Insolvency Service (the industry regulator) and the Insolvency Practitioner's Association.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.