What are the effects of Pre Pack Administration?

Implications for Directors

Generally, the directors of the old business will be appointed as directors of the new company although there is no requirement for this and changes to directors may be made where appropriate.

Directors of the old company must be aware that the liquidator will be required to undertake a director’s disqualification report.

If directors are found to have been allowing the old company to trade while insolvent, they could be accused of wrongful trading. However, it is highly unlikely that this will happen in pre pack administration.

Implications for Employees

The aim of pre pack administration is to move all of the assets of the old company including all employees over to the new business. Because employees and teams are kept together, the new company is given every chance of success.

Under European TUPE law, all employees must be transferred to the new company under the same terms and conditions and length of service rights.

Employees do not have to move to the new company if they do not wish. However, the alternative is likely to be redundancy when the old business is closed.

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Implications for Creditors

Pre pack administration is only implemented where a business is insolvent and unable to pay its debts. Creditor loss is therefore inevitable.

However, because the assets of the business are valued as a whole, it is likely that they will fetch a higher price than if the company was liquidated and its assets sold piece meal.

As such, creditors are likely to get a better return where a pre pack is implemented than they would do if the company was simply liquidated.

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