Article on Pre-Pack Administrations

An interesting article on Pre-Pack Administrations:
Kindly supplied by Parkin S Booth, Insolvency Practitioners
www.parkinsbooth.co.uk (Tel: 0151 236 4331)

On 15 September 2003 the Enterprise Act became law with the loss of preferential status for H M Revenue & Customs and the replacement of Administrative Receiverships with Administrations for floating charge holders.

One of the key changes introduced by this legislation was the ability of directors to be able to appoint an Administrator out of Court with the consent of the charge holder(s). Administrators were able therefore to be appointed and execute sales of businesses quickly and without any ratification by creditors, other than charge holders. So evolved the Pre-Pack sale which in short is a sale of a business at the commencement of an Administration, it having been arranged beforehand. This transaction can ensure the smooth handover of a business’ ownership with minimal disruption to its ability to maintain on-going operations.

Any negativity surrounding the public perception of Pre-Packs tends to focus on the sale of the business to a connected party – generally the existing directors. This aspect of a phoenix is viewed with suspicion; is this just the directors “dumping debt” and carrying on regardless? It is a fact that in many situations the directors are special, or even the only, purchasers. The aim of an Administrator is to maximise the return to creditors and that generally means maximising the value of the business and assets. If the highest offer comes from existing management, all other things being equal the Administrator will have no qualms in selling the business to them - and quite rightly so as creditors may be equally unhappy if a significantly lower offer from an unconnected third party was accepted which resulted in a lower dividend.

There is a perception that some directors/charge holders and Insolvency Practitioners may have abused the Pre-Pack process which gave rise to the release of Statement of Insolvency Practice (SIP) 16 on 1 January 2009. SIP 16 sets out what is considered as good practice and must be implemented by all practitioners when considering a Pre-Pack sale.

SIP16 details the information which must be disclosed to creditors and to the Insolvency Service in all Pre-Pack cases which includes:

· The importance of the justifiable premium (the price paid by the purchaser over and above the market value in return for exclusivity).

· Any valuations obtained and the agent’s input.

· Efforts made to consult with secured creditors, key suppliers and other stakeholders prior to the sale.

· Marketing activities undertaken by the company and/or the Administrator (albeit often on a no names basis).

· Prompt notification to creditors setting out actions undertaken to justify a Pre-Pack sale.

· Evidence of why trading, whilst a full marketing campaign was undertaken, is not appropriate.

The Pre-Pack is clearly here to stay, but the above clearly imposes significant requirements upon the Insolvency Practitioner who must ensure that a Pre-Pack transaction is seen to be transparent and above board. In the right circumstances, however, it is the appropriate process. It allows a quick seamless transition of an insolvent company’s business and assets where the business may otherwise implode. It permits, provided good practice is followed, for the optimum return to creditors which is the prime focus for any Insolvency Practitioner.