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Insolvency ‘Pre-Packs’ – do they work?

Insolvency ‘Pre-Packs’ – do they work?

What is a Pre-Pack?

A Pre-Pack occurs when a company arranges to sell its business before being placed into Administration. The company's business and assets are professionally valued and, subject to a suitable offer being received, a sale agreement is drawn up by solicitors (but not signed at this stage). Following this, the company is placed into Administration and the sale is completed almost simultaneously by the appointed Administrator.

Only the business and assets of the company are sold. The liabilities do not transfer and remain with the old company. The sale may include some or all of the following:

  • Trading name
  • Client list
  • Goodwill
  • Order book
  • Premises
  • Stock
  • Plant and machinery
  • Intellectual property

The purchaser can then commence trading immediately utilising the assets purchased, thereby retaining as much value in the business as possible.

Do Pre-Packs work?

In almost all situations a Pre-Pack is a way of rescuing the business, retaining jobs and often with the possibility of a better return to creditors. If you class this as a measure of success then yes they do work.

From the creditors' perspective they are often left confused and frustrated, understandably so, as to how a business can close its doors one day and be back up and running the next without the responsibility of the previous liabilities. Often there is little consultation with creditors during the planning process. Usually, this is not for a lack of wanting to consult but often to protect the value in the business and assets. The reason being is that the amounts to be realised from the sale of assets are likely to dissipate quickly once the cat is out of the bag.

Getting involved - Shifting the balance of responsibility

What can creditors do after the Administration and sale, surely it's too late? Well, the Administrator has to report to creditors within 8 weeks of the Administration commencing. The report contains the Administrator's proposals which define everything that he or she has done since taking office and intends to do to achieve the purpose of the Administration. The proposals require the sanction of creditors and this is where creditors can make a difference. Creditors should ensure that questions are asked on the process; how will the Administrators ensure they work to recover monies for creditors, what decisions have been made, why were they made, how did they ensure compliance with SIP 16 (see below) and how were creditors engaged in the process. If creditors feel uncertain about the Administrator's proposals then concerns can and should be raised.

Are Pre-Packs here to stay?

In short, yes. The Government recently announced that it will no longer be seeking to introduce new legislation to monitor/control Pre-Packs. Instead, they intend to review the relatively new guidance for Insolvency Practitioners, SIP 16, which was brought into force in 2009. The original aim of SIP 16 was to promote greater transparency and creditor involvement both prior to and during the Pre-Pack process and it is expected that the review may well enhance such requirements.

How do I find out more?

If you are director or a creditor and are unsure about your options or the process involved in a Pre-Pack then contact John Rimmer at BRI Business Recovery and Insolvency on 02476 226839 for an initial consultation, in confidence, no obligation and at no charge.