Pre-pack Administrations

JMW provides legal advice to business owners, directors and managers, insolvency practitioners and other interested parties in any aspect of a pre-pack administration. Our insolvency solicitors are highly experienced in providing the guidance needed by each.

There is a perception that pre-pack administrations can permit failing companies to walk away from their creditors while being able to maintain the best assets and simply carry on in business. Very often the new business will be owned by the same management, trade with the same name and have the same suppliers. However, the positive aspects of pre-packs are rarely reported. They can be invaluable in keeping a business trading, saving jobs and in providing a better return for creditors when compared to liquidation.

Find out more about how our pre-pack administration solicitors can help you or your business by getting in touch today. Simply call us on 0345 872 6666 or complete our online enquiry form and a member of the team will give you a call back.  

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What is a pre-pack?

A pre-pack is where a buyer is lined up for an insolvent company's business (or assets) before it goes into a formal insolvency process, usually administration, and sold immediately after the appointment of the insolvency practitioner.

Invariably, while potential purchasers are approached in advance and valuation exercises performed, little open marketing of the business is carried out. Management are usually in the best position to move rapidly as little or no due diligence is required. Secured creditors are usually made aware of the transaction as they are generally required to release their security. Unsecured creditors, however, are usually not told about the pre-pack until after it has been completed.

Example scenarios

In the right circumstances, a pre-pack can be a restructuring process of first resort. It has been shown to be invaluable in the scenario where a business is viable in the long term but has been overwhelmed, perhaps by a combination of failing customers, a decline in orders and/or an aggressive pack of creditors. 

A statutory interim moratorium provided by the notice of intention to appoint administrators - where appropriate - which prevents creditor action against companies, can and has provided critical breathing space to allow insolvency practitioners to work with management to broker a deal either with existing directors or a third party to take the business and assets into a new trading vehicle with goodwill preserved, jobs retained and with the prospect of long term viability maintained. 

Secured creditors will recover some or all of what is owed to them and unsecured creditors will perhaps recover a small proportion of what is owed to them, but will also retain the relationship with a viable customer at a time when new business is hard to find. Importantly where unsecured creditors do not have an economic interest in the outcome of the administration, they will not be able to stand in the way of a successful restructuring of the business that must necessarily be pre-packed to preserve goodwill, where trading on is impossible due to a lack of funding and where the ability to market the business widely is constrained by lack of buyers with adequate funding or the need to preserve contracts and goodwill.

What businesses are best suited to a pre-pack?

A pre-pack allows an administrator to quickly and confidentially sell a failing business before it is permanently damaged.

The types of business where permanent damage can rapidly occur are ones where the principal assets are employees or intellectual property. Employees at a business that has announced its failure and is being marketed openly for sale are unlikely to wait to be rescued. There is a high risk they will search for alternative employment, leaving the business with no assets. It is virtually impossible to trade on a service business out of insolvency other than via a pre-pack administration.

For many businesses the value is in its brand. Intangible items such as brand and goodwill can be irreparably harmed by insolvency. Businesses with few realisable tangible assets but a strong brand are also best suited for a pre-pack. Retailers often fall into this category where most stores are leased and stock held under supplier retention of title clauses.

Arguments for the use of a pre-pack

Saving jobs

Pre-packs could help to preserve more jobs compared to a sale of the business as a going concern arranged after the commencement of insolvency proceedings.

A better return for secured creditors

Secured creditors can expect to receive a higher return in a pre-pack compared to a business sale. Unsecured creditors, however, tend to fare less well on average.

The value of the business is retained

Pre-packs are best suited when the business's principal assets are the employees, contracts or intellectual property, as is found in all service businesses. Once a company's financial difficulties become public, it becomes difficult to retain the staff, suppliers and customers necessary to keep the company viable. A pre-pack can be used to bring about the sale of a business that may otherwise have been shut down.

Survival of the business

Rather than wait for the company's banks or creditors to appoint an administrator or wind the company up, a pre-pack administration allows the current shareholders to take proactive steps to ensure the survival of the business, an option not open to them otherwise.

It is the proper judgment of the administrator that is behind their recommendation of the suitability of the pre-pack administration process in any given case. They 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 while marketing the assets more extensively.

Arguments against the use of pre-packs

The highest levels of criticism are levelled where existing management buy back the business following private negotiations with an insolvency practitioner and then continue to trade clear of the original debts in a new 'phoenix' company. Unsecured creditors kept in the dark are understandably suspicious of the pre-pack procedure, fuelling claims of illegitimate, self-serving alliances between directors and insolvency practitioners.

Administrator's conflict of interest

Claims of a conflict of interest can arise if an insolvency practitioner who has been acting as an adviser to the original company, to its directors or managers or to an interested third party, is then subsequently appointed as an administrator to execute the sale of the business, as they may have previously given advice to one or more of the interested parties.

The business should have been marketed openly beforehand

Claims that a pre-pack administration is used when the business could and should have instead been more widely marketed, even for a short period of time, to see if there were any higher offers available.

Creditors have no say in the process

Creditors often object to the fact that they had no possibility of rejecting the new company's offer to purchase the business. They are presented with a 'done deal'.

Businesses should not be sold back to the original owners/managers

Creditors who lose out often feel aggrieved that the original owners/managers who they blame for their loss are able to run and profit from the new business. However, the sale of a business back to its original owners/managers is not an exclusive feature of pre-packs.

Improved reporting requirements

In the right hands and in the right circumstances, pre-packs are a valuable tool in rescuing insolvent businesses and their use has grown considerably since the Enterprise Act 2002. Pre-packaged administrations are open to abuse, however, and the government recognises that the regulatory and enforcement regimes in operation to spot and prevent abuse should be understood and seen to be effective.

Statement of Insolvency Practice 16 (SIP 16) was introduced on January 1 2009 to alleviate some of the criticisms and arguments against the use of pre-packs and to help improve their transparency. The aim of SIP 16 is that creditors are given sufficient information for them to understand the circumstances surrounding the sale and why the particular course of action was chosen. It requires insolvency practitioners to disclose to creditors why the decision to carry out a pre-pack was taken, the associated information concerning that decision and the connections between the purchasing company and the company in administration.

Company Voluntary Arrangements

Company Voluntary Arrangements (CVAs) are sometimes considered viable alternatives to pre-pack administrations, particularly since the introduction of SIP (Statement of Insolvency Practice), which requires a higher degree of transparency for creditors in a pre-pack than previously.

The main aims of a CVA are usually to restructure the financing of the company, renegotiate its debts and leasing arrangements, and to reach payment agreements with creditors in satisfaction of their debts at an amount higher than would be achievable in an administration. This leaves the existing management team in place to properly focus on the running of the business with less of the previous time consuming distractions arising from creditor pressure.

The advantages to creditors are that the CVA arrangements are transparent, they have a chance to comment and vote upon, and to accept or reject, the proposals and have an opportunity to recover a higher dividend payment than would be likely should the company be placed in administration.

Why choose JMW?

If your business is involved in a pre-pack administration or you are weighing up the pros and cons of such an arrangement, JMW can help you make the right decisions. Our pre-pack administration solicitors are experienced in assisting businesses of all sizes and we can advise as to whether a pre-pack administration is suitable for you.

Talk to Us

If your business is involved in a pre-pack administration or company voluntary arrangement, or will likely be at some point in the near future, JMW can provide invaluable advice to ensure everything runs smoothly. To get in touch, simply call us on 0345 872 6666 or complete our online enquiry form and a member of the team will give you a call back.

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