Pre-Packs – How do they differ from other insolvency sales, and how do I know if I need one?

The most common insolvency procedures for companies are administration and liquidation. In administration, the insolvent company is protected from creditors whilst a buyer is sought or a restructure agreed. Once appointed, the Administrator can enter into and terminate contracts, negotiate with key suppliers and customers, streamline the workforce, close underperforming stores or divisions, raise finance, and exercise various statutory powers in order to make the business more attractive to potential purchasers and investors. The Administrator will conduct a period of open marketing with a view to achieving the best possible price for the restructured, revitalised and streamlined business.

Liquidation on the other hand almost always results in the cessation of trade and the end of the business in its current form. Once appointed, the Liquidator will make any remaining staff redundant and commence work to wind up the company’s operations and realise its assets, usually by way of an auction sale. Whilst a business sale out of liquidation can be achieved, its suitability is limited, as creditors receive advance notification of the Liquidator’s appointment and value in the business as a going concern is lost.

A prepack administration is a business rescue procedure with one fundamental difference: the sale of the business is agreed (under the guidance of an insolvency practitioner) before the administration appointment takes place, and completes immediately upon the Administrator’s appointment. The result is that the deal is done and the business is sold before creditors are aware that the company has appointed an Administrator, and the new business picks up seamlessly from where the old company left off. Employees transfer to the new company on the completion of the sale, and the new company commences trading with a clean balance sheet. Creditors are presented with detailed information relating to the sale of the business, but crucially, only after the sale has completed. Publicity is kept to a minimum, allowing maximum value to be achieved.

Prepack risks

In a traditional administration, the business is controlled by the Administrator, a qualified professional with extensive experience in handling negotiations and managing the interests of multiple stakeholders. The Administrator must act in the best interests of creditors at all times, and he will use his resources and network of key suppliers, financiers and industry specialists to ensure that returns to creditors are maximised.

In a prepack administration, the directors of the new company are in control of the business from day 1. Whilst certain key suppliers may have been approached by the insolvency practitioner prior to the prepack deal, the directors of the new company (who may or may not be the same management team) must be prepared to effectively manage those relationships which are crucial to the ongoing success of the business from the outset. Suppliers may impose an uplift on prices in an attempt to recoup some of their debt, and creditors’ perceptions of the prepack process can be challenging to ongoing relationships.

What do creditors get out of a prepack?

It must be demonstrated that a prepack sale represents a better deal for creditors than a traditional administration or winding up. Nevertheless, there is widespread creditor opposition to prepack sales due to the lack of transparency surrounding the negotiations, and consequently it is important to communicate openly with creditors once the sale has taken place. Within [7 days] the Administrator must circulate creditors with a document providing specific details relating to the sale (including the identity of the purchasers, the extent of any marketing or the reasons why marketing was not appropriate, and the consideration for the sale and the terms of payment) and why it represents the best outcome for creditors.

Prepack advantages:

• Seamless transfer of the business to a new company with a clean balance sheet
• Jobs saved as employees transfer to the new company
• Better result for creditors
• Efficient and cost-effective restructuring (Administrator will not incur fees to trade the business)
• Less risk of adverse publicity
• Value preserved in WIP and debtor ledger (both can be problematic to realise in a traditional administration)
• Quick and straightforward appointment process

For more info on Pre Pack Administration’s generally click HERE

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