What is a pre-pack?
There is no prescribed legal definition of a pre-packaged sale however it is widely understood to refer to the sale of the assets of a company in distress to a purchaser which is agreed prior to the company going into administration. When the sale is agreed, the company is put into administration and the administrator completes the sale on or following their appointment.
Why might a pre-pack be the right solution?
In some cases, it would be both commercially astute and beneficial to creditors for a sale to happen quickly. When a company approaches administration the public perception of an insolvency could harm the ability for the business to continue to trade successfully, whereas if the assets can be sold immediately, it may protect the reputation and goodwill of the company as well as preserve jobs. The cost of the administration will also be decreased and the preservation of reputation means a higher sale price, both of which may yield a greater return to creditors.
Criticisms
Pre-pack sales have often been criticised for their lack of transparency as creditors are not consulted prior to the sale. In practice, the assets of a company are often pre-packed to the directors of the old company or another connected party, such as a family member. This was analysed in the Graham Review in 2014 where it was suggested that an independent panel of experienced business people, known as the Pre-pack Pool (the Pool), should be consulted to offer their opinion on whether or not a pre-pack sale to a proposed party was appropriate and in the best interest of creditors. The government subsequently implemented the Graham Review recommendations in November 2015.
Pre-Pack Pool or SIP 16?
When a pre-pack sale is undertaken, the insolvency practitioner must currently set out a SIP 16 statement in the administrator’s proposals (which will be filed at Companies House), detailing the reasons why the sale was undertaken in addition to the alternative options explored. This is to justify the decision to creditors and to illustrate that appropriate due diligence was conducted by the insolvency practitioner with sufficient regard for the interest of the body of creditors.
An insolvency practitioner negotiating a pre-pack sale also has the voluntary option to refer a pre-pack to the Pool. The advantages of this are that, with the approval of the Pool the deal is perceived to be more transparent and independent, especially where there is a sale to a connected party.
Despite the number of pre-packs to connected parties increasing since 2016 the number of referrals to the Pool remains significantly lower than the government expected with only around 200 applications dealt with a year. The government review of SIP 16 statements also found that there has been a considerable degree in variation in their quality and detail, particularly in relation to marketing activities, valuations obtained and the lack of reference to a viability statement (outlining how the company intends to survive for at least 12 months following the date of the statement).
Proposed Changes
Accordingly, the government has recently announced that it plans to further regulate pre-pack sales to connected parties. The proposed framework is set out below:
- The regulations will apply where there is a disposal of all or a substantial part of a company’s assets.
- An administrator will not be able to dispose of the company’s assets to a connected party within the first 8 weeks of the administration without the written consent of the creditors or a written opinion from an independent party advising that it is appropriate. The purchasing party will be required to seek the written opinion.
- The administrator must be convinced of the 3rd party’s independence and the 3rd party must be eligible and independent from the company, the administrator and the purchaser.
- The report will state that either the case is made or not made. If the case is not made, then the administrator may still proceed but will be required to clearly outline the reason for doing so. A copy of the report should also be sent to the creditors and to Companies House.
The government’s plans are broadly welcomed in the industry as a way to ensure that pre-pack sales are completed in a fair and transparent manner and enhance public confidence in an important insolvency process. It will also not come as a coincidence that the new measures are to be implemented in the backdrop of the Covid-19 pandemic, particularly given that a wave of insolvencies are expected once the government schemes to support businesses and jobs come to an end.
For more information please get in touch with our Insolvency and Restructuring team.
