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29/06/2017

Pre-pack administrations: A short guide

With several examples of pre-pack administrations having recently featured in the news, it seems like a suitable moment to put up a short guide to so-called “pre-packs”.

What is a pre-pack?

Pre-pack administrations occur when discretion and speed are necessary to protect the value of a business, and usually allow businesses’ operations to continue uninterrupted, which is often the best outcome for all parties, including employees and creditors. Pre-packs can only be opted for when an insolvency practitioner (IP) judges that one will offer the best returns to creditors, when compared with other forms of insolvency.

In a pre-pack administration, a business is ‘pre-packaged’ for sale and marketed to buyers, with a sale agreed before the insolvent company officially enters a formal insolvency procedure; the period between a company declaring it is insolvent and its business being sold can in some cases last just a few minutes, with the business having been marketed and a sale agreed beforehand. Creditors are informed of the sale once it has taken place.

Pre-packs play an important role in rescuing jobs and businesses, as the IP can arrange a purchaser for the business before its model is irreparably damaged by the full extent of the company’s financial difficulties becoming public knowledge, for example through departure of key staff, the loss of customer contracts, and suppliers withdrawing their services or issuing winding-up orders. Additionally, the insolvent company’s assets can be sold to a single buyer, rather than being auctioned or sold off piecemeal, potentially giving creditors a better price, while disruption to the staff taken forward into the newly-formed company is minimal, with their TUPE rights preserved. A number of pre-packs are sold to ‘connected parties’ – such as, for example, the directors of the insolvent company.

Oversight and numbers

All pre-packs have to be overseen by an insolvency practitioner, a highly regulated and specially licensed individual who acts as an officer of the court to supervise statutory insolvency procedures, and who is subject to stringent oversight from a regulated professional body. If insolvency practitioners are derelict in carrying out any aspect of their duty, they face professional penalties, including fines and being disqualified. Any creditor who is unhappy with the work carried out by an insolvency practitioner on a pre-pack has a right to complain to the relevant regulator.

In the period 1 November 2015 to 31 December 2016, there were 371 pre-pack administrations, with 188 (51%) involving a purchase by a connected party, according to the Pre-Pack Pool (see below), while over a similar timescale (1 October 2015-31 December 2016), there were 1,689 administrations in total. Yet despite making up a relatively small number of administrations, pre-packs tend to attract a fair amount of media and public attention.

The Graham review

Several years ago, the Department of Business, Innovation and Skills (now BEIS) commissioned Teresa Graham CBE to review the pre-pack system, and to present recommendations aimed at improving transparency and confidence among creditors and among the general public more widely. Graham’s review was published in 2014, and stated that, in her view, pre-packs “have their place in the insolvency market” but that public confidence in them could be improved by the all relevant parties voluntarily adopting the review’s recommendations. R3 responded to the review’s publication by calling it “an excellent contribution to [the] debate”. The six recommendations in the report have since been implemented, with the introduction of SIP 16 version 3 in November 2015 and with the creation of the Pre-Pack Pool, a voluntary process for connected parties purchasing a company’s business or assets through a pre-pack administration which gives an opportunity to assure creditors that the sale has been reviewed by independent business experts and that the case for a pre-pack has been made.

Since the Graham review, and following the updating of SIP 16, criticism of pre-packs has become more muted, although several recent high-profile examples have kept the issue in the public consciousness. Engagement between government departments and representatives of the profession and the implementation of Graham review’s recommendations has led to more transparency around the pre-pack process, and more options for creditors to seek independent evaluation of the value realised through a pre-pack, along with more awareness of the channels for them to seek redress if desired.

R3 is confident that the insolvency and restructuring profession oversees pre-packs independently and equitably, with only a tiny number of cases brought to regulators’ attention each year, and even fewer upheld. Pre-packs will always be in the public eye, to a certain degree, and R3 will continue to monitor the situation, and suggest improvements to the regulatory framework as we see them; while pre-packs aren’t suitable in all (or even most) corporate insolvencies, they are a well-established way of maximising returns to creditors, and of giving businesses a fresh start.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.