Updated July 2016
Please note that this Briefing Note is not maintained, and reflects the law as at the date of publication or update
This Briefing Note explains why pre-packaged sales agreements are used in insolvency procedures and highlights the advantages and disadvantages of the process. This Briefing Note should not be relied upon as legal advice and you should contact us for advice on your specific circumstances.
What is a pre-pack?
A pre-pack is the name given to an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a buyer before the appointment of an administrator but the sale is completed by the administrator shortly after their appointment. The buyer may be a competitor or, as is often the case, already involved e.g. the existing management team.
Advantages of a pre-pack
- The main advantage of the pre-pack process is the speed with which it can be concluded. For example:
- the costs of the administration process can be reduced, which can result in a better return for creditors;
- key staff can be retained as they may not have time to find alternative employment;
- more jobs may be saved than in a normal administration process;
- there is more scope for stock to be sold at full value especially if it has limited shelf life; and
- adverse publicity, media speculation or damage to the goodwill of the business may be reduced.
- Some unsecured creditors, such as suppliers, may be engaged by the new business.
- Often there is no other option. The alternative would be liquidation and the immediate cessation of the company’s business and most likely a nil return for unsecured creditors.
Disadvantages of a pre-pack
Perceived lack of transparency
Pre-pack arrangements are generally made quickly and in private, albeit with the co-operation of secured creditors. However, unsecured creditors are often unaware that a pre-pack is going to happen, so they do not have the opportunity to protect their interests by considering and voting on the pre-pack proposal. The SIP 16 statement, which administrators are obliged to provide to creditors, gives details of the sale and is provided after the sale is concluded.
Lack of accountability
Administrators involved in pre-packs do not have to obtain prior approval for their actions from the court or creditors in the same way as they do in a normal administration. There are no specific regulations which deal with pre-packs, which can lead to a lack of confidence in the openness of the procedure.
They are perceived as not maximising returns for unsecured creditors
A pre-pack sale of a business is often conducted with limited marketing compared with a normal administration. Arguably therefore it is impossible for the proposed administrator to test the market fully because of the risk of the company’s financial difficulties being leaked.
A pre-pack is a short-term fix
A pre-pack does not subject the company to a restructuring, which is often perceived as necessary if the business is to survive in the longer term. It is debatable whether a business that has already failed and written off liabilities in the pre-pack process, will do any better under the control of the same management team.
Pre-packs are similar to the outlawed practice of creating “phoenix” companies
Creditors tend to be suspicious of pre-packs when the business is sold back to the original owners. Under the pre-pack guidelines, administrators have to disclose to creditors (among other things) the name of the buyer and whether there is any connection between the buyer and the company. There are concerns that there is the potential for abuse of the process by directors seeking to purchase the business at an advantageous price and simply avoiding paying creditors, which is why so much information has to be given to creditors in the form of a SIP 16 statement by the administrators when a pre-pack is undertaken.
Issues for directors of a pre-packed company
The directors of a company who are involved in a pre-pack need to make sure that they do everything they can do to minimise loss to creditors. Directors should take independent legal advice, especially if they acquire an interest in the company’s business and assets through the pre-pack.
The Insolvency Service has indicated that it will use its enforcement powers to penalise any directors who misuse the administration process to seek to gain a benefit themselves.