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Pre Pack AdministrationsPre Pack Administrations

» Posted on: 6 May 2009
» Posted by: Andrew Livesey
» Service area: Business Support & Restructuring

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The recent dramatic rise in company failures has attracted a great deal of comment in the financial and other press. One particular aspect of company insolvency which has been thrust into the limelight is the concept of a “pre pack administration”. What exactly does this mean?

Many of us will be familiar with the situation in which a company customer goes into administration only to emerge again within in a matter of days looking remarkably similar to the business that existed before and often under the control of the same management. In some ways this is inevitable.

The scarcity of new credit, the retreat by existing lenders to their security positions, and the absence of readily available “risk” capital very often means that existing management are the most likely, if not the only, candidate to take the business forward. In some cases the existing lender will be prepared to give it another go as opposed to simply writing off the debt. This is particularly the case when, through an insolvency process, the company is able to drop non-essential trade creditors and very often arrears of crown payments thus affording the business an improved chance of succeeding second time round.

How does a “pre pack” administration differ? In terms of the end result very often not a great deal. However a pre pack is predicated upon the fact that the business will be sold at or immediately after the point at which it goes into administration without being extensively marketed through the administration process and on the basis that the administrators will not trade the business whilst seeking bids.

In many cases there are solid commercial reasons why a pre packaged sale back to management is the only viable route. Administrators will not take the risk of trading a loss making business. To do so is to eat into the potential return to the secured creditors (usually banks) from the sale of assets. At the very least this can amount to a reputational issue if not a financial issue. In other cases management may have extensively explored the opportunity of a third party or trade sale in the run up to administration without success. In other cases there are difficult issues of irreparable damage to the customer base if there is no continuity of supply, or risk of dissipation of assets which are not owned by the company.

However, the concept of a pre packaged sale is at odds with the statutory framework for an administration which requires the administrator to set out his proposals to deal with the business to the creditors who then have the opportunity to approve or reject those same proposals. By effecting a pre-package sale back to management, the administrators are taking the creditors out of the decision making loop. Consequently it falls to the administrator to justify the necessity for a pre-pack sale.

From 1 January 2009 an administrator is subject to a new statement of insolvency practice on the information which must be provided to creditors in the context of a pre-pack sale. In essence the administrator must outline the background to their appointment and the reasons why they consider that a pre-pack sale would represent the best outcome for creditors. This requires them to provide details of the name of the purchaser of the business, the price paid and any connection that the purchaser had with the former directors or shareholders of the company selling the business or assets.

The intention behind this requirement is to provide greater transparency to creditors and to improve consumer confidence. However the reality of the position, particularly in the current economic climate, is that the pre-pack administration represents a powerful tool in the toolbox of the administrator in restructuring under performing business.

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