Pre Packs - creditor bashing or legitimate business rescue?
When a company is facing financial meltdown the decision to sell as a going concern should be made with one purpose in mind – to maximise the realisable value of the assets and therefore minimise the potential loss to creditors who may have already been harmed.
The term ‘Pre-Pack’ Administration has become widely used and it is often wrongly assumed that, in a pre pack, the company’s assets or business are sold prior to a formal insolvency process. The term actually refers to an arrangement where the sale of all or part of a company’s assets is negotiated with a purchaser prior to the appointment of an Administrator. Once appointed the Administrator then implements the sale either immediately on or shortly after formal appointment. The sale is made to a third party or a connected party.
One of the biggest problems currently faced by the insolvency profession is the negative public perception of pre-packs. Can it be right that when a company is insolvent it can go into Administration and sell its business and assets within what appears to be ‘minutes’ and trades on without the burden of the old company’s debt? For some time creditors and their trade bodies have been widely reported in the media expressing their concerns about the ‘pre-pack’ process and what they perceive to be its potential mis-use.
Since January 2009 Statement of Insolvency Practice 16 (SIP 16) has provided a clear disclosure requirement for Insolvency Practitioners (IPs) and management so that creditors can be satisfied that the best value has been obtained for the company’s assets in the circumstances. But the introduction of the SIP hasn’t prevented further criticism of pre-pack sales by aggrieved creditors.
At the end of March 2011 the Insolvency Service published the outcome of wider inquiry into pre-packs and set out its proposals for statutory amendments. The new regulations proposed include a requirement for IP’s to give creditors 3 days notice of a proposed pre-pack sale of assets to a connected party which will enable creditors to intervene if they think it is necessary. The argument is that if the business cannot trade on during this time because of lack of funds or be sold straight away then the value will very quickly diminish, key personnel will leave the business and the customers will start to evaporate.
The main advantage of a sale via a pre-pack arrangement in Administration is that a business can be sold on before its own insolvency devalues and destroys the business and this advantage will be lost if the sale process is delayed leaving the closure of the business and liquidation as potentially the only option. Striking the right balance is essential to ensuring the best possible outcome for creditors. Allowing creditors the ability to oppose a business sale to a connected party may bring greater transparency to the process but at what cost? The value is most often in the continuity and if that is stopped then it is going to be much harder to realise the same value. In just over a quarter of all Administrations in 2010 a pre-pack sale process was used to dispose of the assets and according to the Insolvency Service; in total, 72% of these pre-pack sales were to connected parties. It is worth noting that the majority of connected party sales involve small companies where it is unlikely that an unconnected party would be interested. This is still however the area which appears to be cause most concern. Whilst it might not seem fair that directors of an insolvent business can buy back the company’s assets there needs to be a willingness to accept that in certain circumstances the only sale that will realise value is a sale to a connected party.
We have to be careful though, that steps taken with the best intention to overcome a perception of abuse do not damage the legitimate recovery process and jeopardise many jobs at a time of sensitive economic recovery. It is vital that the Government, creditors and the insolvency professionals strike the right balance in saving jobs, safeguarding the economic activity and re-assuring creditors that the best deal has been done.
Despite the concerns surrounding pre packs, there will always be a legitimate place for
pre-packs in the IP’s tool bag.
To discuss this article, or the process of pre-packs, further, please contact Diane Hill or Mark Getliffe on 0161 245 1000
