A pre-packaged sale (or ‘pre-pack’) refers to an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser, prior to administration and the administrator effects the sale immediately on, or shortly after, his appointment.
This has become a popular choice for directors wishing to continue the existing business in a new company, without any obligation to pay the old company’s creditors and is widely marketed, misleadingly, by unregulated insolvency advisors, who typically seek to sell their services by claiming to ‘act for directors not creditors’.
In certain circumstances a prepack is the right answer. However, it is important to ensure that it is not a case of ‘out of the frying pan and into the fire’ and you need honest professional advice to know if it is right for you.
If you are considering a prepack, consider the following practical points:
- To what extent will you be required to provide personal guarantees to cover any deferred sale consideration?
- To what extent will you be required to provide personal guarantees to a new funder of the business?
- Will your customers be willing to continue to place orders with you, will they become concerned about the viability of the new company and its ability to fulfill future orders?
- Will key suppliers be willing to trade with you, if so, on what terms?
- Will you be ‘blacklisted’ in your industry and what will be the consequences?
- Will your landlord be willing to assign the lease to the premises to your new company?
In addition to the practical issues, there are also legal aspects to consider.
- Despite some of the information being broadcast, particularly on the internet, a director’s first duty in these circumstances is to the creditors. If you act inappropriately, you can suffer significant personal financial and criminal penalties.
- The Administrator has legal and ethical responsibilities and will have to justify the terms of the sale to creditors.
- The Administrators conduct can be subject to a liquidator’s inspection and/or challenged by creditors and could result in transactions entered into being overturned and financial and criminal penalties.
- A Prepack if carried out correctly can be an extremely useful procedure to enable a business to be continued. However, it must be undertaken with regard to the obligations of both the directors and the Administrator, a failure by either party can lead to significant financial or criminal penalties.
- Managing the process properly and being seen to be acting correctly, can overcome a lot of potential difficulties. Whilst the prepack process has become very popular and can appear to be a simple low cost solution to an insolvency, there is a lot of disquiet on the part of government, the insolvency regulators and significant creditor bodies regarding potential abuse. In particular, concern is being expressed regarding the values being attached to assets sold without the market being tested and whether alterative procedures could obtain a better return for creditors.
We have utilised the Prepack process on many occasions, as an effective business rescue tool and our skill is in ensuring that it can be demonstrated to be justified and we have considered and explained all the practical as well the legal implications. If you think a Prepack is right for you, talk to us so that you understand the full facts and can make an informed decision, before you go past the point of no return.
We often find that it is not what you do, but how you do it that makes the difference and our experience in that regard, can help achieve your aims and keep you out of trouble.
For the answer to your business problem, talk to an expert, call us now!