This is probably the hottest topic in our profession at the moment and is the subject of intense political and media scrutiny.
A pre packaged sale (“pre pack”) refers to an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an Administrator, and the Administrator effects the sale immediately on, or shortly after, his appointment.
The rationale for a pre pack is sound, and it is a very valuable mechanism for the preservation of a business going through an insolvency process. During the last recession the strategy adopted was invariably the appointment of Administrative Receivers who would continue to trade a business whilst seeking a purchaser as a going concern. This strategy is often still appropriate; however it has the potential disadvantage of a gradual erosion of the value of the business as customers seek to find alternative suppliers in case the business cannot be sold. The pre pack avoids this; however the criticism has been that the business has not been properly marketed and therefore full value for the business not obtained. Where the business has been purchased by management such criticisms are accentuated, whether real or not.
Statement of Insolvency Practice 16 (“SIP16”)
With effect from 1 November 2013 a new SIP 16 was issued by all of the regulatory bodies of Insolvency Practitioners (“IP’s”) as a guidance note to IP’s setting out required best practice and harmonising IP’s approaches to this particular aspect of insolvency. It should be noted that in a series of cases, the Courts have held that, where the circumstances of the case warrant it, an Administrator has the power to sell assets without the prior approval of the creditors or the permission of the Court. This does not however protect IP’s from challenges to their conduct. The essence of SIP 16 is one of disclosure to unsecured creditors by the IP, giving a detailed explanation and justification of why a pre packaged sale was undertaken, so that they can be satisfied that the Administrator has acted with due regard to their interests.
- What marketing of the business is required
SIP 16 is not prescriptive other than that full disclosure of what marketing has been undertaken is required. There will be cases where marketing is not appropriate. For example, the business may destabilise and lose value if its proposed sale was known. But discreet marketing is usually possible in some form in order to ensure that the best value is obtained and an IP will generally be very wary of not marketing the business, especially if a sale back to management is being contemplated.
- Can directors still purchase a business in a “pre-pack”
Categorically yes, and this will be disclosed by the IP in his first report to creditors. Clearly where management do buy the business, there will be a series of conflicts of interest to manage, and the need to be able to demonstrate that management has paid proper value is accentuated.
- If the assets are valued and a purchaser pays “full value” is this sufficient?
Generally no. A valuation is an opinion and may not reflect intangible value in a business from a special purchaser. Valuations should be obtained, and fully disclosed to unsecured creditors, but are not on their own, an alternative to marketing.
- Is the Government looking to place further restrictions on pre packs?
It was proposed that there be a consultation period whereby the IP would consult with unsecured creditors for a period of 3 days prior to any sale. This proposal has currently been withdrawn as it was considered impractical and potentially damaging to the rescue culture. However, pre packs are still very much on the Government’s radar and further changes to the current regime may be brought in.
- What is the Banks approach to “pre packs”.
This varies considerably. Several Banks have stated that they will not sanction “pre packs”. In reality this means that some Banks will not provide funding to management’s new company in order to acquire their old business. This is an understandable perception issue in that Banks may not want to be seen to fund a new business which acquires the old business and in the process sees their lending repaid in the old business whilst the unsecured creditors of the business remain unpaid. But we are not aware of any Banks which would frustrate a pre pack if it was genuinely in the interests of the general body of creditors.
- What is KRE’s approach to “pre packs”?
We believe that in the current circumstances pre packs are a valuable mechanism to enable businesses to survive and maximise value to all creditors. When we are asked to consider a pre pack we will work with management to identify what needs to be done to ensure compliance with SIP 16 prior to management making a decision to proceed.