A pre pack administration is relatively new in comparison to other insolvency processes. But the insolvency process enables companies to continue trading, reduce overall debt burden, and retain employees, supplier and customers. Once the pre pack administration starts, the insolvency practitioner can sell the company’s assets and business to both third party buyers and directors. The amount realized by selling the company’s assets or business will be divided among its creditors. However, the directors of the company must understand some of the important disadvantages of this insolvency process.
Major Disadvantages of the Pre Pack Administration
- A limited company can use pre pack administration to continue trading while reducing its overall debt burden. But each insolvent company is required to meet certain prerequisites to use the insolvency process. The directors of the company along with the insolvency practitioner must show that the option will benefit the creditors.
- The pre pack administration allows the directors of the insolvency company to buy the assets or business from the insolvency practitioner. But the insolvency practitioner will try to sell the assets at their fair market value to safeguard the interest of creditors. Further, the directors can buy the assets only out of their personal funds. So the directors may require more time to raise the funds required for buying back the old company’s business or assets.
- The insolvent company can retain its existing employees by moving them to the phoenix company. But it will be required to retain the existing employees without altering their employment terms. So the pre pack administration will not help the new company in curtailing operational cost by reducing staff wages. Also, the company may find it challenging to attract new employees.
- To continue trading, the directors of the company must retain its existing suppliers. But the pre pack administration will have a negative impact on the suppliers. So the company has to renegotiate terms and renew contracts to retain the existing suppliers. The adjustment may compel the company to incur additional expenses.
On the whole, the pre pack administration must be carried out diligently to help the insolvent company in continuing trading smoothly. The directors of the company, however, must avail professional advice to ensure that the assets are being sold at their fair market prices. The professional will further help the directors in understanding the best way to reap the benefits of this insolvency process.