What is a 'PRE-PACK'?
A pre-pack is where the sale of a company's business and/or assets is arranged before the start of an insolvency procedure then completed immediately or shortly after the procedure begins. Proceeds from the sale are used to repay the company's creditors.
Pre-packs take place when:
- A company is insolvent (a company is insolvent if it cannot pay its debts when they are due, or if its liabilities outweigh its assets), and;
- An insolvency practitioner agrees a pre-pack is the means of achieving the best possible returns for the company's creditors.
All pre-packs are overseen by a licensed insolvency practitioner. The insolvency practitioner is responsible to a company's creditor body as a whole, not its directors nor one particular creditor.
There were 450 pre-packs in 2018 - equivalent to around one-in-three administrations (and around 3% of all corporate insolvencies).
Pre-packs aren't defined in legislation and are a good example of how the UK's insolvency and restructuring framework has adapted to promote business rescue. Pre-packs are typically used in conjunction with administration.
Why do pre-packs happen?
Pre-packs help protect the value of an insolvent company's business or assets for creditors. The point of a pre-pack is to maximise what can be repaid to an insolvent company's creditors by obtaining the maximum sale price of a company's business or assets. Once it is publicly known how much difficulty a company is in, its value falls: key staff may leave, customers may cancel orders, and the brand may be hurt. The speed and discretion of a pre-pack therefore help protect value for creditors by achieving a sale before the value of a company's business or assets are damaged.
In order to be used, a pre-pack must generate a better return for creditors than any alternative. The administrator must show in their report to creditors that a pre-pack was the best option in the circumstances.
Pre-packs allow businesses to recover from financial difficulties and save jobs. A business' failure and redundancies can have a negative impact on local economies.
Pre-packs are over quickly. This keeps costs down compared to other insolvency procedures and means more money can get back to creditors.
Sales to connected parties
Sometimes a pre-pack might involve a sale to someone with a pre-existing connection to the insolvent company. This is known as a 'connected party' sale. A connected party could be a director or company owner (secured creditors are not considered to be connected parties).
Where sales to connected parties occur, it is because this would have been the most effective way of maximising returns to an insolvent company's creditors. The connected party may have offered the best price for the company's business or assets, or their involvement in the business is crucial to the business' value: they might own important intellectual property, for example.
How do pre-packs work?
- A company is insolvent and calls in an insolvency practitioner for advice (a company's secured lenders can also call in insolvency practitioners). It is decided that a pre-pack is the best possible option for the company's creditors.
- The insolvency practitioner must comply with the requirements and principles of Statement of Insolvency Practice (SIP) 16, which governs pre-packs. SIP16 includes rules on protecting creditors and marketing and valuing a company's business or assets prior to a pre-pack. SIP16 is set by the Joint Insolvency Committee (a panel made up of regulators and other business bodies) and is enforced by the profession's regulators.
- The company's business or assets are valued and marketed (in line with SIP16), and a sale is arranged.
- The company enters administration and, as arranged, its business and/or assets are sold by the administrator. Any money raised from the sale is used to repay the insolvent company's creditors. Purchasers may also agree to pay a proportion of future profits back to the creditors of the old company.
- Creditors are treated equally by insolvency practitioners but are repaid in a strict hierarchy set out by government. You can find details of this hierarchy here. The amount of money repaid to creditors depends on the value of the insolvent company's business and assets.
- In any insolvency procedure, the insolvency practitioner will make a report to creditors. In a pre-pack, this report has to be made within seven days of a sale taking place. SIP16 requires the insolvency practitioner to explain why the pre-pack took place, including why it was a better option than alternatives, and what steps were taken to comply with SIP16. You can find the reports on the Companies House website here.
- If the pre-pack involves a sale to the 'connected party', the purchaser will have the option of referring the sale to an independent opinion provider known as the 'Pre-pack Pool'. This referral happens before the company enters an insolvency procedure. A member of the Pool will provide an opinion on whether the case for the connected party sale has been effectively made. The independent opinion is there to provide creditors with further assurance - beyond that provided by the insolvency practitioner - that a connected party pre-pack sale was the right thing to do. Details of any approach to the Pool are contained in the SIP16 report. Insolvency practitioners are required to make the connected party that the Pool may be approached, but they have no power to compel the purchaser to make a referral.
How are creditors protected in a pre-pack?
All pre-packs are overseen by a licensed insolvency practitioner. Insolvency practitioners are answerable to creditors and have a duty to maximise returns to creditors and to comply with the requirements of SIP16. Failure to fulfil their obligations can lead to regulatory penalties for the insolvency practitioner, including fines and the loss of their licence. Creditors have the option to seek the replacement of the administrator, too.
Creditors can read the administrator's report for information on what steps have been taken in the pre-pack and complain to the insolvency practitioner's regulator if necessary.
The Pre-pack Pool can review connected party pre-packs to provide independent assurance that the case for the pre-pack has been made. Creditors should check administrators' reports for details of any approach to the Pool.
The administrator has the power to investigate directors' actions and refer any wrongdoing to the Insolvency Service. If the directors are determined not to have acted in creditors' best interests they can be disqualified from acting as a director for up to 15 years.
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