Pre-packaged administrations

A useful vehicle for rescue and rehabilitation rather than a refuge for shady deals

It is well known and has (since its inception) been much publicised that the post Enterprise Act administration regime offers an easier, quicker and cheaper method of providing viable businesses with a turnaround/restructuring vehicle than under the old pre-2003 legislation.

The lack (in most cases) of the requirement for an expensive application to court for an administration order, backed by detailed evidence prepared by the proposed administrator, has seen a huge rise in the number of companies entering administration.

Increasingly, as administrators became risk-averse to the dangers of trading a company in administration without adequate funding in an attempt to preserve goodwill whilst seeking a sale at best possible value, the process that has become known as the “pre-pack” came into vogue.  Essentially this process involves much more work in advance of the appointment of an administrator, usually within the framework of an interim moratorium which protects the company from legal actions and enforcement proceedings.  The preparation work will include valuing the assets, seeking out likely interested parties or, where there are none, liaising with existing management to see what ability they had to buy back the business and assets of the company.  Having negotiated the terms of the business and sale agreement and liaised with key creditors where possible/appropriate to gauge their reaction, the appointment will then take place and the completion of the sale will follow immediately thereafter.

The benefits of the pre-pack are easy to outline and there is empirical research available, that has been conducted on behalf of R3 (the trade body for the insolvency profession) which demonstrates that pre-packs will tend to deliver at least marginally better realisations on balance than administrations that trade (usually at a loss) prior to achieving a sale, whether to a third party or existing management in some form.  Moreover, and this is often highlighted as one of its key benefits, pre-packs will tend to preserve the jobs of many, if not all, of the company’s existing workforce.  This is partly due to the fact that (pursuant to employment legislation) the contracts of employment will transfer to the purchaser but also because the administrator will rarely have the ability to meet the monthly/weekly payroll for employees following appointment.  In addition to this, there tends to be little or no interruption to the operation of a business and much less likelihood therefore of significant damage to its goodwill.

The main criticism levelled at pre-packs has been that they are not particularly transparent in that a lot of the work involved is carried out in a vacuum and behind closed doors and, by the time that the creditors have the ability to comment through their response at an initial meeting to the administrator’s proposals, the sale has already been delivered as a “fait accompli”.  Where the sale is to the former management in some form and through the vehicle of a newly-incorporated company, there is the suggestion of a “stitch-up”, which disenfranchises the creditors of the company and often reimposes the former directors in a new company vehicle, which is back in control of the old business and assets but shorn of old company’s pre-administration liabilities.

The main point to make, when defending the integrity of the pre-pack as opposed to its obvious commercial merits, is that it is still the proper judgment of the administrator which is behind his recommendation of the suitability of the pre-pack administration process in any given case.  He will still need to have conducted a frank appraisal of the financial position of the company, the value of the assets, the potential market for those assets and the prospect of being able to trade whilst marketing the assets more extensively and so on.

Further to the above, the publication of Statement of Insolvency Practice 16 (which is in effect from 1 January 2009 and which sets out best practice for licensed insolvency practitioners, outlining in detail the information that must be disclosed to creditors to include the identity of the purchaser and the links with the existing directors) will help to ensure that creditors are given a much more rounded picture as to what has happened in any pre-pack and the reasoning for it.  A recent survey conducted by R3 has indicated that the rate of compliance with the SIP is around 99%, which is a credit to the profession.

There may be legislative changes in the future, such as increasing the availability of company voluntary arrangements (“CVAs”) and providing priority for funding in CVAs and administrations, which affect the numbers of pre-packs, but for the moment the pre-pack arguably remains one of the most popular recovery procedures and (when used properly) justifiably so.

For further information on pre-packaged administrations or other corporate recovery and insolvency issues please contact Richard Wolff, Head of Corporate Recovery and Insolvency on 0345 872 6666 or email Richard Wolff.

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