Pre-packs

Pre-packs

Contents

What is a pre-pack?

A pre-pack in the context of an administration refers to deals negotiated by the directors of a company finding itself in financial difficulties prior to going into administration. These negotiations would be aimed at selling off parts or all of the company as a going concern to either one or more third parties and are then executed by the administrator once they are appointed.

Positive and negative aspects of a pre-pack

The pre-pack deals are negotiated before the company formally goes into administration because in that way the deals can be negotiated without the financial difficulties of the company becoming publicly known. Once the financial difficulties of a company are in the open it affects the company's ability to trade as normal due to suppliers becoming wary to supply on credit and customers not willing to deal with an insolvent company. It is sometimes the only option available to keep the company trading and the employees in their jobs, especially where the company has reached a point where it has no liquidity to continue trading in administration while the search for a buyer is made.

If a pre-pack is negotiated and concluded successfully there is usually a smooth transition in the business operations and minimal upheaval for the employees, who might otherwise be lost to competitors.

In an attempt to gain the above benefits of a pre-pack deal, the availability on the open market of a company experiencing financial difficulty would not necessarily be as widely publicised as would otherwise be the case in a normal solvent sale of a company. Also the consent of the creditors are not required to complete the pre-pack deal. It is therefore obvious that creditors would be doubtful whether the best possible price was obtained for the company in the pre-pack deal. They would be even more suspicious if the purchaser is a connected party to the insolvent company. A pre-pack is effectively a sale of the assets of the company while the debts remain in the existing financially distressed company. Where the purchaser is then a connected party, for example a director, it is really asset-stripping the company allowing the connected party to continue trading without the burden of the debts.

SIP 16 Guidelines

To counter these concerns and make the process of a pre-pack sale more transparent, certain guidelines for Insolvency Practitioners are issued by the Insolvency Service in the form of a Statement of Insolvency Practice (SIP). SIP 16 requires IPs to provide the creditors with an SIP16 statement with the first notification of the pre-packaged sale and that must be within 7 calendar days of the transaction. In the SIP 16 statement sufficient information must be provided to show that the pre-pack sale was concluded in the best interests of the creditors and that all required steps were taken in accordance with the SIP16 guidelines. It must also show that alternatives to the pre-pack sale were considered and why the pre-pack transaction was the best option. Where the steps taken deviate from the SIP16 guidelines the IP is to explain why a different course of action was taken.

Some of the SIP16 guidelines include:

  • Essential marketing guidelines as regards extent and duration to achieve the best price for the company.
  • A requirement that the IP is to urge any purchaser that is a connected party to obtain the opinion of the pre-pack pool as regards the reasonableness of the pre-pack deal and to prepare a viability statement setting out how the purchaser intends making the company viable in the long run. The pre-pack pool is an independent body of experienced business people who will offer an opinion on the purchase of a business and/or its assets by connected parties to a company where a pre-packaged sale is proposed.
  • The names and professional qualifications of valuers and advisors and confirmation that they are independent and carry professional indemnity insurance must be contained in the SIP16 statement.
  • Details of the pre-pack transaction must be included in the SIP16 statement, for example, the identity of the purchaser, information regarding the purchaser's connection to the company, details of the assets sold, the nature of the transaction and the sale consideration.