Pre-pack sales in company administrations have gained significant attention and utilization in recent years.
This process involves the pre-arrangement of a sale of a financially distressed company’s assets, typically before the appointment of an administrator or insolvency practitioner.
It aims to streamline the administration process, allowing for a faster and more controlled sale of the company’s assets, often to a buyer with a vested interest in the business. Pre-packaged sales offer several advantages, such as preserving the value of the business, minimising disruption to employees and customers, and maximising returns for creditors.
They also attract criticism due to concerns about transparency, potential conflicts of interest, and the limited involvement of creditors in the decision-making process.
Despite the ongoing debates surrounding their use, pre-packaged sales remain a popular tool for companies navigating financial distress and seeking to secure the best outcome for all stakeholders involved.
What is a Pre Pack Sale
A Pre-Pack Sale is a strategic and efficient solution for businesses facing financial distress. It involves the sale of a company’s assets, including its business, to a pre-arranged buyer, typically shortly after appointing an administrator.
The primary goal of a Pre-Pack Sale is to ensure a smooth transition and maximize the value of the company’s assets. By swiftly transferring the business to a new owner, the company can minimise disruption, preserve jobs, and maintain customer relationships.
This approach allows for a quicker recovery and provides a fresh start for the business, enabling it to regain stability and thrive in the future.
Key Takeaways:
- A pre-pack sale is a process in company administration where a company’s business and assets are sold to a predetermined buyer before the appointment of an administrator. This allows for a quick and smooth transfer of the company’s operations.
- The steps involved in a typical pre-pack sale include planning and executing the sale process, receiving offers and agreeing on sale terms, and completing the sale through undertakings. Directors and insolvency practitioners play crucial roles in this process.
- A pre-pack sale offers several advantages, such as suspending directors’ powers to avoid potential breaches of duties, bringing credibility to the sale process through the administrator’s decision, and allowing legal challenges against the administrator’s actions instead of the directors’ actions.
- The sale and purchase agreement in a pre-pack sale determines the assets included and excluded in the sale, limits the buyer’s liability for the seller’s debts and liabilities, and identifies the risks and responsibilities assumed by the buyer.
- Justification for a pre-pack sale includes the limited knowledge of the administrator and the need to distribute sale proceeds to creditors, potential advantages for existing directors and shareholders in valuing the business and assets, and the competitiveness of existing directors and shareholders during accelerated sale processes.
- A pre-pack sale strategy offers benefits such as the quick and smooth transfer of a company’s business and assets, minimizing erosion of confidence among suppliers, customers, and employees, and the potential for saving more jobs compared to other insolvency strategies.
The Process of a Pre Pack Sale
In understanding the process of a pre-pack sale, it is essential to examine the various steps involved, the roles played by directors and insolvency practitioners, the importance of receiving offers and agreeing on sale terms before the appointment of an administrator, and the finalization of the pre-pack sale itself.
- In light of the company’s directors acknowledging an unavoidable administration or insolvent liquidation, they sought guidance from an insolvency practitioner. After careful consideration, the directors concluded that a pre-pack sale within an administration would be a viable solution.
- To assess the value of the company’s business and assets and gauge market interest, the insolvency practitioner assisted the directors in devising and executing an accelerated sale process.
- Subsequently, offers were received for the company’s business and assets, revealing that appointing the insolvency practitioner as the administrator would yield the optimal outcome for the company’s creditors. This would enable the insolvency practitioner to swiftly finalize the pre-pack sale upon assuming the role of administrator.
- Once the parties reached a consensus on the terms of a sale and purchase agreement, along with any supplementary documentation, these arrangements were agreed upon prior to the appointment of the administrator.
- To ensure a seamless transition, certain commitments were made, which would take effect immediately upon the administrator’s appointment. These undertakings were specifically designed to facilitate the completion of the sale and purchase moments after the administrator’s official assumption of duties.
- Consequently, the administrator was appointed, marking the culmination of the pre-pack sale process.
What to expect in the sale and purchase agreement?
The sale and purchase agreement will provide clear specifications regarding the assets that are encompassed within the sale, such as goodwill, plant and machinery, customer contracts, and stock. It will also outline the assets that are not part of the sale, including book debts, claims, and prepayments.
It’s important to note that the specific assets included or excluded may vary from sale to sale, and there may be instances where assets within the same category are divided between those included and those excluded. For instance, profitable customer contracts may be included, while unprofitable customer contracts may be excluded, ensuring a well-defined and tailored approach to the transaction.
It is customary for the sale and purchase agreement to explicitly exclude the buyer from assuming most of the seller’s debts and other liabilities. This means that, in general, the buyer is not held accountable for such obligations, unless there are specific legal provisions that impose responsibility on the buyer, as is the case with TUPE (Transfer of Undertakings Protection of Employment) regulations. These provisions ensure that the buyer’s liability is limited to the extent required by law, allowing for a clear and delineated allocation of responsibilities in the transaction.
To optimise the financial outcomes during the seller’s administration, the administrator may request the buyer’s cooperation in assuming a select few of the seller’s existing obligations. This could involve honoring warranty claims, particularly if it aids the administrator in recovering book debts.
However, in a typical pre-pack sale scenario, the buyer primarily acquires the necessary assets to operate the business, unburdened by any claims related to the seller’s liabilities. Conversely, the seller retains ownership of assets that are not required by the buyer, such as book debts, along with the associated liabilities. This approach ensures a streamlined transfer of assets and liabilities, enabling the buyer to focus on efficiently managing the acquired business.
The sale and purchase agreement, apart from the aforementioned considerations, will primarily be formulated in favor of the seller and the seller’s administrator. It will be structured in a way that excludes representations and warranties, placing the responsibility for any risks associated with the transferred business and assets squarely on the buyer.
This approach is justified by the limited familiarity the administrator has with the business and assets, as well as the necessity to distribute the sale proceeds to the seller’s creditors. Imposing representations and warranties on the seller would impede the administrator’s ability to carry out this distribution effectively.
Furthermore, the agreed-upon price for the business and assets reflects the understanding that the buyer willingly assumes all relevant risks, providing further justification for the approach taken in the agreement.
Advantages and Disadvantages of a Pre-pack Sale
The benefits of a pre-pack sale strategy depend on the exact circumstances, but here are a number of pro’s and con’s include:
Advantages of a Pre-Pack Sale in Administration:
- Speedy Resolution: One significant advantage of a pre-pack sale in administration is the ability to swiftly and efficiently address financial distress. By preparing the sale and purchase agreement before the appointment of an administrator, the process can be executed promptly. This enables the business to continue operating seamlessly under new ownership, minimizing disruption and preserving its value.
- Maximising Asset Value: A pre-pack sale allows for a careful selection of assets, ensuring that the buyer acquires only what is necessary to sustain and grow the business. By shedding non-profitable or redundant assets, the sale can maximize the value of the company’s remaining assets. This approach benefits both the buyer, who acquires a leaner and more viable business, and the seller’s creditors, who have a better chance of receiving higher returns.
Disadvantages of a Pre-Pack Sale in Administration:
- Lack of Transparency: One drawback of a pre-pack sale is the potential for limited transparency in the process. Since the sale is negotiated and arranged before the administrator’s appointment, stakeholders such as employees, unsecured creditors, or suppliers might not have full visibility or the opportunity to participate in the decision-making process. This lack of transparency can lead to perceptions of unfairness or undermine stakeholder trust.
- Creditors’ Interests: Another concern is that a pre-pack sale may not always prioritize the interests of all creditors equally. While the sale aims to maximize returns, certain creditors, particularly unsecured or smaller creditors, may not receive optimal recovery. This can create discontent and raise questions about the fairness of the process, especially if the pre-pack sale is perceived as favoring specific stakeholders or benefiting the existing management or shareholders.
It’s important to note that the advantages and disadvantages of a pre-pack sale can vary depending on the specific circumstances and the manner in which the process is executed.
What are the Criticisms of Administration pre-pack sales
Over the years, pre-pack sales have faced considerable criticism. Pre-pack sales are mostly criticised for:
- While the buyer gains a distinct advantage by acquiring a company’s business and assets without shouldering its liabilities through a pre-pack sale, it is crucial to consider whether this truly addresses the underlying cause of the seller’s failure. While the buyer may find themselves in a significantly stronger position than the seller prior to administration, it’s important to question whether this alone adequately tackles the root issues that led to the seller’s difficulties. It may be necessary for the buyer to undertake a more extensive restructuring effort after the completion of the pre-pack sale in order to ensure their own long-term survival and sustainability in the market.
- In many cases, unsecured creditors may find themselves unaware of the planning of a pre-pack sale, leaving them with limited or no opportunity to safeguard their interests. The lack of knowledge or involvement can lead to concerns regarding the protection of their rights and the fairness of the process. On the contrary, secured creditors typically play a more active role as their consent is often required for the release of their security. This involvement becomes particularly relevant when assets secured by mortgages or fixed charges are included in the pre-pack sale, ensuring that the secured creditors have a say in the transaction.
- The administrator’s discretion plays a pivotal role in determining whether a pre-pack sale should be executed. This decision rests on the administrator’s commercial judgement, allowing them to proceed with the sale of the company’s business and assets even before convening a meeting with the company’s creditors. While the pre-pack sale will be disclosed in the administrator’s report to the creditors, the creditors themselves will not have the opportunity to vote on the transaction.
- In certain situations, conducting a comprehensive market test by advertising for potential buyers of a company’s business and assets may not be feasible. This is particularly true when the revelation of the company’s financial difficulties could jeopardize the value of the business and assets. The risk of competitors deliberately targeting the company’s crucial customers and employees could lead to the erosion of its value and market position. Therefore, in such cases, a restricted or no marketing exercise may be deemed necessary to safeguard the company’s interests.
- Due to heightened scrutiny, creditors often approach pre-pack sales with increased suspicion, particularly when the business and assets are sold to the original directors and/or shareholders of the seller company. In response to this criticism, additional measures have been implemented to address concerns and enhance transparency when completing a pre-pack sale involving a connected party.
Guidelines and Regulations for company administrators on pre-pack sales
Administrators, being officers of the court, have always adhered to stringent rules and regulations governing their professional conduct. These regulations extend to the guidance provided by their respective professional bodies, including the Statement of Insolvency Practice 16 (SIP 16), which specifically addresses pre-pack sales in administrations.
Detailed information about SIP 16 can be accessed at www.r3.org.uk, providing transparency and ensuring compliance in the pre-pack sale process.
In addition to existing regulations, new measures were introduced in 2021 through the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations. These regulations aim to enhance creditor protection in pre-pack sales involving connected parties. To comply with these regulations, administrators are required to obtain a report from an independent evaluator, whose services are commissioned and funded by the connected party.
This independent report, which can be obtained swiftly and at a reasonable cost (starting from £1,500 plus VAT), assesses whether the consideration provided by the buyer for the seller’s business and assets is deemed reasonable.
While seeking creditor approval is less common due to the urgency of pre-pack sales, the administrator ensures that a copy of the evaluator’s report is made available to the company’s creditors, ensuring transparency and accountability in the process.
Five Facts About “What is a Pre Pack Sale”:
- ✅ A pre-pack sale is a process through which a company enters administration and its business and assets are immediately sold by the administrator under a sale that was arranged before the administrator was appointed.(Source: Team Research)
- ✅ The typical steps involved in a pre-pack sale include the company’s directors recognizing the need for administration or liquidation, taking advice from an insolvency practitioner, conducting an accelerated sale process, receiving offers for the business and assets, and agreeing on the terms of a sale before the administrator is appointed.(Source: Team Research)
- ✅ In a pre-pack sale, the sale and purchase agreement distinguishes between included assets (such as goodwill, plant and machinery, and customer contracts) and excluded assets (such as book debts and prepayments), and the buyer usually assumes minimal liability for the seller’s debts and liabilities.(Source: Team Research)
- ✅ The main advantage of a pre-pack sale for the company’s directors is that it is the administrator’s decision to complete the sale, protecting the directors from allegations of breaches of duties and claims.(Source: Team Research)
- ✅ The benefits of a pre-pack sale strategy can include a quick and smooth transfer of a company’s business and assets, minimal erosion of confidence among suppliers, customers, and employees, and the potential to save more jobs compared to other insolvency strategies.(Source: Team Research)
FAQs about What Is A Pre Pack Sale
A typical pre-pack sale in a company administration involves the company’s directors recognizing the need for administration, seeking advice from an insolvency practitioner, planning and carrying out an accelerated sale process, receiving offers for the business and assets, agreeing on sale terms before the administrator is appointed, giving undertakings for post-appointment completion, and finally, the appointment of the administrator and completion of the pre-pack sale.
The main advantage for the company’s directors is that it is the administrator’s decision to complete the sale, not the directors’. This suspends the directors' powers and protects them from allegations of breaches of duties and claims. If creditors are unhappy with the sale, they would typically need to challenge the administrator's actions rather than the directors' actions.
The sale and purchase agreement will distinguish between the assets included in the sale (such as goodwill, plant and machinery, customer contracts, and stock) and the assets excluded from the sale (such as book debts, claims, and prepayments). The specific inclusion or exclusion of assets may vary from sale to sale.
The benefits of a pre-pack sale strategy can include a quick and smooth transfer of the company's business and assets, minimisation of erosion of confidence among suppliers, customers, and employees, and potential to save more jobs compared to other insolvency strategies or processes. What are the typical steps involved in a pre-pack sale?
What advantages do the company's directors have in completing a pre-pack sale?
What assets are included and excluded in a pre-pack sale?
What are the benefits of a pre-pack sale strategy?
Conclusion
In conclusion, a pre-pack sale in administration can be a valuable tool for swiftly addressing financial distress and maximizing the value of a company’s business and assets. While it offers advantages such as speed and efficient continuation of operations under new ownership, there are also considerations and potential drawbacks to be aware of. Transparency, creditor involvement, and addressing the root causes of the seller’s difficulties are important factors to be taken into account.
With the regulations, rules, and guidance in place, as well as the evolving practices aimed at enhancing transparency and creditor protection, pre-pack sales in administration continue to evolve as a viable option for achieving a fair and optimal outcome for all stakeholders involved.
It is crucial for administrators, professionals, and stakeholders to navigate this process with integrity, adhering to the highest standards of conduct to preserve trust and confidence in the administration process.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.