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
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.
Copyright 2006 - 2010