Administrations are still on the rise and our high streets, retail parks and shopping centres are changing appearance as units lie empty. You may not have heard the term ‘pre-packs’ but it could become an option for retailers to help overcome this depressing trend.  

In this edition of Retail Matters we have pulled together the facts about pre-packs, the pros and cons and an outline of the ways in which insolvency practitioners and other professional bodies are aiming to ensure that the procedure is not abused.  

What is a pre-pack?  

The term “pre-pack” or “pre-packaged sale” refers to an agreement to sell all or part of an insolvent company’s business and/or assets to a buyer (usually a new company) negotiated before an administration commences, with the administrators then affecting the sale immediately after their appointment.  

The use of “pre-packs” in administrations is growing and some recent high profile retail administrations have meant that they are receiving greater attention in the media than ever before.  

Much of this attention has focused on the suspicion which unsecured creditors attach to pre-packs and the perception that pre-packs simply allow management teams to strip the valuable assets from a company and leave onerous liabilities and debts behind.  

Pros and Cons of a pre-pack  

Pros  

  • Pre-packs are a relatively quick and efficient way of transferring the business and/or assets of an insolvent company. This has an impact on the costs involved in an administration, which can result in a better return for creditors.  
  • Pre-packs can save more jobs by ensuring that any disruption to business continuity is kept to a minimum.  
  • Pre-packs, through business continuity, can minimise the loss of goodwill which suppliers, customers and other persons who deal with the business may feel and therefore realise more money for creditors than if the businesses assets were simply liquidated.  

Cons  

  • Unsecured creditors do not need to be consulted and have no opportunity to consider or vote on the proposals until after the sale has taken place.  
  • As a pre-pack is negotiated in advance of the administrators being appointed, it is argued that the administrators do not have opportunity to test the market for the assets and/or business being transferred and so are unable to ensure that the best price has been achieved.  
  • If the business is being sold back to the original owners or managers, creditors may be suspicious that the process is being used as an attempt to create a “phoenix” company which has taken all of the valuable assets from the old company, but left behind the debts.

Like every system then pre-pack administrations are not a perfect answer to everyone's problem when a company is experiencing severe difficulties, but it is another tool available to owners or managers of a struggling business to consider using.  

Guidelines for administrators  

Since 1 January 2009, the Insolvency Service has introduced Statement of Insolvency Practice 16 (SIP 16) which is intended to improve the transparency on prepackaged administrations.  

The guidelines detail the information which should always be given to creditors on a pre-pack including, amongst other things, the identity of the buyer, any connection between the buyer and the insolvent company, any valuations of the business or assets being transferred and details of the consideration for the sale and the terms of payment.  

Although the guidelines are not legally binding, insolvency practitioners may face regulatory or disciplinary action if the guidelines are not followed.  

Can pre-packs be challenged?  

There is a statutory right for creditors to bring an action against an administrator under the Insolvency Act 1986. Such an action may arise where the conduct of the administrators causes unfair harm to a creditor’s interest or where the administrators are not performing their functions quickly and efficiently.  

The Insolvency Service has also set up a complaints “hot-line” for pre-packs to enable creditors to complain about a pre-pack administration. This may be used where creditors consider that they have been unduly disadvantaged by an administration (or any other corporate insolvency process).  

As mentioned above, administrators could face regulatory or disciplinary action if they have failed to comply with SIP 16.  

What does pre-pack administration mean to a retail supplier?

Retailers are often heavily reliant on consumer confidence in brands, valuable assets of a retail business which can quickly become eroded when it becomes known that a business is in distress. Furthermore, retail suppliers are often labour intensive and uncertainty regarding employees can be a significant worry to directors and employees alike.  

While critics argue that a pre-pack sale doesn’t always allow sufficient time for directors to come to an informed decision or creditors to be consulted, conversely the advantage of a pre-pack sale for a retail supplier is the speed at which the situation can be resolved.  

As shown by recent high profile pre-packs on the high street, by moving quickly and ensuring continuity of service, the damage to the retailer’s name, lack of confidence of suppliers and customers and uncertainty regarding employees can be minimised. Although a prepack sale is only one option available to a distressed retailer, it should not be ruled out without careful consideration.