A “pre-packaged sale”, or “pre-pack”, is 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 effected shortly (perhaps immediately) after appointment. The administrator effects the sale without the business being offered to the open market. Administration has numerous benefits for the business in question, primarily the fact that creditors’ rights are confined to the selling company and do not continue against the business transferred, the retention of employees and the continuation of the business.

Recent high profile pre-packs have involved retailer USC and coffee seller Whittard. In the case of USC the West Coast Capital Group immediately repurchased the retailer when it went into administration. Media attention has focused on the fact that the purchaser in a pre-pack will sometimes be formed of previous owners who buy back the business free of many onerous liabilities. Some commentators have characterised the pre-pack regime as a “fraudster’s charter”, suggesting that some businesses have been operated irresponsibly in the run-up to administration, with the owners being confident that they can take it back, debt-free. It has been suggested that pre-packs are a ‘stitch up’ that seek to avoid the obligations to creditors. However, it is arguable that the former owners may have the requisite experience and background knowledge to continue trading to the benefit of all concerned, and there need not be any impropriety, or suggestion of misconduct, just because the previous owners happen to be involved in the business going forward.

Statements of Insolvency Practice (SIPs) are issued following agreement between the insolvency regulatory authorities. Their purpose is to set out basic principles and essential procedures with which licensed insolvency practitioners must comply. SIP 16 governs pre-packs.

Prior to any appointment of administrators, companies should consider the duties which they owe to parties who might be affected by the arrangement and should have regard to the associated risks. A detailed record of the reasoning behind the decision to undertake a pre-pack sale should explain and justify why the decision was taken. This preparation will also assist the directors of a business in relation to the inevitable examination of their conduct, and should help deal with any suggestion of wrongful or fraudulent trading.

The Insolvency Service has recently stated that the use of pre-pack sales from administrations will face much closer scrutiny. The deputy chief executive of the service declared that the Insolvency Service should look to ensure the administrator has followed “the spirit” of legislation that governs pre-pack administrations.

With much closer scrutiny of pre-pack administrations envisaged in the future it is essential for the company, directors and administrators to conduct relevant preparatory work, whilst considering the manner of disposal of the business.