These difficult times have seen an increase in the pre-pack sale of businesses out of Administration and undoubtedly we shall see more in the weeks to come. To define a pre-pack it is a procedure whereby a sale of a business within an insolvent company is negotiated prior to formal insolvency. The deal is completed by an Insolvency Practitioner or Administrator at the point of, or soon after, formal appointment of the Administrator by the company. R3, the insolvency governing body, has recently brought out a code of practice for pre-packs called Statement of Insolvency Practice (SIP) 16 partly in response to recent negative publicity.
There are benefits in a pre-pack to the business in that it provides continuity of business thereby protecting goodwill and maintaining jobs and value, especially for service based businesses. The current owner/manager is often best placed to be the purchaser. It avoids trading whilst insolvent which can lead to the directors of the business being held personally responsible for the debts of the business. In cases where funding cannot be found it is quicker and cheaper, in terms of professional fees, than trading on in insolvency and it is often the only alternative to ceasing to trade and winding up the business. The Administrator is an officer of the Court and so must be able to demonstrate that he acted in the interests of all creditors even though their interests can sometimes be conflicting; there is a commercial and legal balancing act to be performed.
Where there are benefits there are often drawbacks. Under a pre-pack there is little time to buy-in other stakeholders and the Administrator is restricted in terms of potential purchasers, it being impractical to do any overt marketing. There is often a need to strike bargains with “ransom” creditors, such as the landlord or key suppliers, but creditors in general do not need to be consulted and are unable to approve the transaction prior to completion. This often leaves creditors feeling understandably aggrieved and negative publicity and suspicion may hamper the business thereafter. The creditors can theoretically apply to court to reverse the transaction, but the Administrator will only do a pre-pack if he is confident that fair value was achieved and that trading on was not viable or too risky.
Pre-pack is often quoted as the only alternative to ceasing to trade and winding up the business, but in recent years there has been an increase in the use of the Company Voluntary Arrangement (CVA). In a CVA the company negotiates a legally binding agreement with its creditors to pay off a percentage of the debts over a period of time. This agreement is monitored by a supervisor, again a licensed IP, who ensures that the company is keeping up with the payments negotiated under the agreement and then distributes the proceeds to the creditors, on a pro rata, basis at regular intervals. The major benefit of this solution is that at least the creditors get some return and the company continues to trade. The drawback is that the sins of the past may yet return if management have not learnt their lesson.
For further information on pre-pack sales please contact Andrew Forster at The FD Centre.