What is a pre pack?

Before we start, let’s be clear exactly what a pre pack sale is. A pre pack sale is a sale of a business that has entered into Administration, with the sale being effected almost immediately after the Administrators have been appointed – in most cases, this is usually the very same day. The term “pre pack” is used, given that virtually all of the negotiations to buy the business are completed pre the appointment of the Administrators. Once the Administrators are formally appointed, they then have the legal powers to complete the sale.

Sounds all a bit odd? Not really – in most such cases, speed is absolutely vital in ensuring the survivability of the business, especially with one that has significant financial problems. In such circumstances, very few if any prospective Administrators like trading on – the risks are just too great. There are exceptions – BHS, Woolworths etc. – those companies had huge amounts of stock that could easily be sold through their own retail outlets.

The pre pack time lines

Let’s look now at the mechanics and key issues to consider when thinking about a potential pre pack Administration. The time line works something like this:

• The company directors recognise the company has problems and seeks out the help of a reputable insolvency practitioner. Alternatively, the company’s bankers/lenders decide that the directors need advice and recommend that an Insolvency Practitioner should consult with them.
• The directors and IP meet so that the IP can get a better understanding of what the company does, what its problems are, and what solutions are available.
• Assuming that a pre pack sale of the business is the most viable option, and the one that returns the most to creditors, then the planning for this process begins.
• The IP will organise a valuation of the company’s assets, whilst the directors look to secure the funding to buy the assets back and then to continue trading.
• Once the valuations and funding are finalised, the IP will arrange for his solicitor to send to the directors’ solicitor, a draft sales agreement – usually referred to as the SPA – sale and purchase agreement.
• Once the terms are finalised in draft, the IP will then assist the directors in completing the relevant forms to formally appoint the IP as Administrator.
• As soon as the Administrator is appointed, he will then immediately complete the sale of the business.
• Depending on the size of company and its complexity, pre packs are usually completed within two to three weeks of the IP first being consulted.

The legal considerations

The main legal requirement of any pre-packaged sale, is that it must be the deal that returns the most back to creditors. However, there are some transactions where that simply will not be possible, given that after paying secured creditors and the costs of the Administrator, there will be no surplus funds available.

When the Enterprise Act came into force , it abolished the right of HM Revenue & Customs to be preferential creditors. To partially compensate for this and also, to try and return some funds to unsecured creditors, the provision dealing with the “prescribed part” became law. Basically in all Administrations, the Administrator has to put to one side a proportion of the sales proceeds in order that a dividend can be paid to the unsecured creditors. This is worked out by reference to the “net property”. The net property is the amount realised for none charged assets, after the costs associated with the realisation have been deducted. The Administrator must then take 50% of the first £10,000 of net property and 20% of the balance up to a maximum of £600,000, and use this to pay a dividend to unsecured creditors. Let’s say that the Administrator has realised £100,000 for stock, and other assets that are not charged. His costs amount to £20,000, so the net property is therefore £80,000. The prescribed part is therefore £19,000, being 50% of the first £10,000 (£5,000) and 20% of the next £70,000 (£14,000).

Another key consideration are the SIPs that any IP must work with – Statement of Insolvency Practice. These are effectively best practice guidelines that all IPs must follow. The two key SIPs that affect pre pack Administrations are SIP 16 and SIP3. SIP 16 deals with all of the relevant issues affecting how an Administrator goes about effecting a pre pack sale. SIP 16 covers the following key points:

• The IP must be clear as to his role in giving advice to the company pre appointment and his role post appointment in acting as Administrator.
• The IP must inform the directors of the existence of the pre pack pool and recommend that the directors submit their proposal for pre pack sale to the pre pack pool. The directors are under no legal obligation to submit their plans to the pre pack pool, although doing so does help with the issue of transparency.
• Independent professional valuations of the company’s assets should be organised by the IP.
• The IP/Administrator must demonstrate that he has marketed the business to the widest possible audience – the guidelines on this are fairly strict and are given in an appendix attached to SIP 16.
• The Administrator must within 7 days of the transaction completing, issue a comprehensive report to all creditors explaining why the pre-packaged sale was in the best interest of creditors.

SIP 13 deals with transactions with connected parties – as most pre packs are with existing directors, then this SIP will usually also apply. This SIP is not as detailed as SIP 16 and the key issue is that the Administrator must demonstrate that, by completing a sale of the business back to the directors, that he has acted in the best interests of the creditors.

General considerations

Most of the onus for ensuring that a pre-packaged sale complies with statute and the relevant SIPs, falls mainly on the IP/Administrator. That said, you do need comfort that the IP/Administrator has complied with all relevant statutes/SIPs etc. to ensure that there’s no comeback later on. The best way to ensure that you are protected is to engage a suitably qualified lawyer to act on your behalf – ideally, one that has some insolvency knowledge.

For most directors looking to complete a pre-packaged sale, the most important issue is finance – how to fund the actual acquisition of the business and then how to fund trading in the new business until cash flow kicks in. These issues are best addressed with your own accountants. It is an issue though, that you must have resolved before contemplating a pre-packaged sale/purchase – very few Administrators give credit!

Richard Saville is a Licensed Insolvency Practitioner with Corporate Financial Solutions. He has over 40 years of experience helping companies large and small who may be experiencing financial problems. Richard takes pride helping to save struggling businesses and return them to profitability. He has an extremely broad knowledge across most industries having effectively dealt with pretty much every type of business around!