A pre-pack administration is where a sale of the business by the Administrator is effected immediately following his appointment as Administrator. Existing management are the most likely purchasers and the business is not marketed openly which gives rise to a level of suspicion from the creditors if they are not being paid in full. This is effectively closed marketing is limited at best. As such there are procedures in place (SIP 16 explained below) to give transparency to the sale and provide information to creditors.
The “pre-pack” works by a sale agreement being negotiated prior to the administration and then completed immediately after, with minimum disruption to the actual business.
A more open market sale could also be effected by marketing the business to known interested parties or competitors, which has a number of advantages in terms of “testing the market” but this is likely to be limited to enable a seamless transaction of the business. A pre-pack allows a rapid transfer of the underlying business out of administration. This maximises the amount recovered and generally preserves jobs as well as customer and supplier relationships.
In the right circumstances, the pre-pack is a very useful addition to the corporate recovery toolbox, together with debt/equity swaps, compromises with creditors and trading administrations. Wider disclosure of the circumstances under SIP 16 are required to give creditors transparency in respect of the transaction.
In a pre-pack scenario an independent professional valuation of the business and its assets must be undertaken to ensure that it is sold for value. This is completed prior to any Administration/Sale so as to provide protection to all parties as to the level of consideration being paid.
The four reasons for a pre-pack are generally:
- A seamless transaction of the business is required to avoid the loss of brand, customers, employers e.g: marketing services business
- The costs of marketing and trading are excessive in comparison to the Company assets involved
- There are fundamental difficulties in trading in administration e.g: offering warranties; and
- There are specific circumstances which mean that an open marketing process is not possible or it is difficult/impossible to transfer the business to any party other than a specific party (e.g: landlord is a connected party)
An insolvency practitioner must comply with SIP 16 if using the ‘pre-pack’ procedure. In essence, SIP 16 emphasises the importance of transparency in pre-pack administration sales and outlines the duties of insolvency practitioners.
Complying with SIP 16 is a required procedure when a ‘pre-packaged sale’ (or ‘pre-pack’) under which the sale of all or part of a company’s business or assets is sold to a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment.
The reasoning is that creditors do not have an opportunity to scrutinise the sale before it happens and so the Administrator must provide a detailed report of his actions and reasoning for making the sale to act as a justification to creditors of why a pre-pack was undertaken.
Below is a list of information that is required but not limited to what must be disclosed to creditors:
- The source of the administrator’s initial introduction
- The extent of the administrator’s involvement prior to appointment
- Any marketing activities conducted by the company and/or the administrator
- Any valuations obtained of the business or the underlying assets
- The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes
- Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration
- Details of requests made to potential funders to fund working capital requirements
- Whether efforts were made to consult with major creditors
- The date of the transaction
- Details of the assets involved and the nature of the transaction
- The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration
- If the sale is part of a wider transaction, a description of the other aspects of the transaction
- The identity of the purchaser
- Any connection between the purchaser and the directors, shareholders or secured creditors of the company
- The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred
- Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business
- Any options, buy-back arrangements or similar conditions attached to the contract of sale
In some exceptional circumstances the information is not always provided and the reasons should be stated. This is to take into considerations of commercial confidentiality that would outweigh the need for creditors to be provided with this information.
The report is however, always submitted to the Insolvency Service for scrutiny, hence the transparency of SIP 16.