Whilst the remaining restrictions are due to end in July, many businesses remain, and are likely to continue to do so, in a difficult trading environment saddled with COVID-19 related debt that will need servicing. It is because of this that many predict that these otherwise strong businesses will seek to explore the ‘Pre-Pack’ Administration process.
Once a company is put into administration, pre-pack is the process where an appointed administrator facilitates the immediate prearranged sale of the business (or sometimes only the assets of the business). Crucially, under the pre-pack process, the sale (including the buyer and terms of the agreement) has already been agreed prior to the administrator’s appointment. In the event of an asset-only sale, the remainder of the business is either sold in a separate transaction or placed into liquidation.
Advantages of Pre-Packs
Although they can be controversial Pre-Packs do have unique and often sought-after benefits. For example:
- In comparison to a traditional insolvency process and sale, in many circumstances the pre-pack sale will result in a largely smooth and fast transfer from one business owner to the next. The speed of the transaction will greatly assist with price-erosion and, encouragingly for the creditors, it can help minimise the cost of the administration process.
- Due to the pace of the process, Pre-Packs can help minimise the damage to a business’s reputation and, consequently, the confidence of the business’s customers, employees, and suppliers that is so often caused by entering into insolvency proceedings. Confidence in the business’s ability to survive, continue trading, and continuing paying their staff can be invaluable commodities.
- In a traditional sale or restructure, attempts are made to continue to trade the business with the inevitability of a later sale or restructuring process. In order to facilitate trade, employment security and its associated costs are often heavily scrutinised. However, and in tandem with the above using the pre-pack process can help to secure the roles of more of the business’s employees.
- Businesses sold using the Pre-Pack process are usually sold to those with a vested interest already in the business, such as directors or the existing shareholders. Selling to those with a pre-existing understanding of the business and knowledge as to its strengths and weaknesses can be hugely advantageous and key to long-term survival.
- Finally, it should not be ignored that Pre-Pack is often the only alternative to liquidation and consequently the immediate end of the business.
Disadvantages of using Pre-Packs
Despite their advantages, Pre-Packs can be met with criticism, mainly by unsecured creditors or insolvency professionals. This is largely due to the apparent lack of transparency and accountability.
- Pre-Pack’s draw most suspicion in circumstances where the business, or key assets, are sold back to the original shareholders or directors of the now-insolvent company. Creditors, whether unsecured or not, may see this as allowing upper management using assets to strip the company and write-off the debt. Recent forms mean that this procedure, is now much more heavily regulated. When the sale of the business, or its assets, is being made to a connected person significant disclosure must now be made to the creditors. For example: within the first 8 weeks of administration, an administrator will be unable to complete a sale of a substantial part of a company's property to a connected person without either:
- In some circumstances many unsecured creditors (i.e suppliers, contractors or customers) do not realise the pre-pack sale is going ahead and therefore may not be able to protect their interests sufficiently. Similarly, the business hierarchy and the administrator will be aware of any associated detriment to the value of the business if its financial difficulties are leaked. Administrators are therefore sometimes criticised for not sufficiently testing the market of the business or advertising to an adequately wide group of interested parties. This limited approach to marketing can spark criticism from those who believe the true value of the business and the assets would have been better suited to a traditional administration.
- The approval of creditors; or
- An independent written opinion (positive or negative).
A connected person can include directors, shadow directors or other officers of the company, as well as connected companies. Independent legal advice should be taken by any director who is looking to acquire an interest in the business through the pre-pack process.
Despite the above, Pre-Packs remain an increasingly prevalent option for business approaching insolvency and should not be ignored under justifiable circumstances.
For further information on the recent reforms and the Pre-Pack process, watch our recent webinar: Insolvency - Looking ahead Pre-packs and Reforms Post Covid