A pre-pack – what is it?
A general definition would be where the sale of a business is negotiated prior to the appointment of an administrator, with completion of the sale taking place immediately following the administrator's appointment.
- Facilitates the sale of a business as a going concern without damaging goodwill and customer confidence
- Usually results in continuation of employment
- Should achieve an enhanced 'going concern' value for the assets
- Creates a potentially better return to creditors through enhanced asset realisations
- Realisation of the book debts protected as trading is continued
- The business is not widely marketed for sale so it is difficult to know whether the best price has been obtained
- The creditors are not usually advised until after the deed is done
- Creditors do not like the apparent lack of transparency
- Suppliers' retention of title may be frustrated
- Sufficient funding is required to acquire the business and assets and also for working capital
The idea of selling a business back to management as part of an insolvency process is not new. Pre-packs have recently become subject to negative media comment, due to the perceived lack of transparency, and the appearance of it being an easy way for directors to acquire the good bits of the business back from an insolvent position at a cheap cost, and avoid accrued liabilities.
On 1st January 2009, a new directive known as SIP16 was imposed by the insolvency regulators, setting out requirements to be fulfilled by insolvency practitioners involved in pre-packs. It is intended to show transparency and avoid any abuse of the process. The Insolvency Service has also responded by carrying out spot checks on specific cases to identify any abuse. Examples have been quoted of directors walking into the offices of insolvency practitioners and specifically asking for a pre-pack, simply to avoid the company's debts.
Portland has used the pre-pack process to achieve the benefits highlighted above, and it can be a very effective business rescue tool, provided it is carried out carefully. Where it has been used, we have been careful to ensure that the process is appropriate and can be justified in the circumstances.