Pre-packs
What is a pre-pack?
A pre-pack is a pre-packaged sale agreement which disposes of a distressed company's business or assets. Pre-pack sales are often made to parties connected to the company, such as its directors or managers.
If you are in financial difficulties it is worth discussing this option with us. Contact Tony Forster on 0117 945 3040 (direct dial), 07764 241 560 (mobile) or email tforster@metcalfes.co.uk or contact Marti Burgess on 0117 945 3042 (direct dial) or email mburgess@metcalfes.co.uk
Why use a pre-pack?
It is rarely cost-effective to keep a company trading if it is already in financial difficulties. Its directors must act to protect the interests of creditors and avoid any allegations of misconduct.
A pre-pack can offer several important benefits as well as making the administration process quicker and more economical:
- Adverse publicity or damage to the goodwill of the business may be avoided by swift action.
- Employees' jobs may be saved- especially key staff may be preserved.
- Cash is realised faster for secured creditors.
What are the disadvantages of a pre-pack?
- Pre-pack arrangements are generally made quickly and in private, albeit with the cooperation of secured creditors. Often, the first that an unsecured creditor knows of a pre-pack sale is the announcement of its completion and the creditor faces a new company, with the same management in place and operating the same business, but free of debt.
- Unsecured creditors may feel that they are financially worse off from pre-pack (unless they are used by the new business, as above) and have no opportunity to provide input into the sale arrangement.
How does a pre-pack work?
A pre-pack is arranged through an Insolvency Specialist (we can assist you in choosing one of these) by negotiation between interested parties prior to the formal appointment of an administrator. If a pre-pack arrangement involves any party connected to the company or its directors, he will need to demonstrate independence.
It is good practice when negotiating a pre-pack that:
- Valuations are performed by third parties.
- The market should be investigated if possible to agree prices on an arms' length basis.
- All courses of action that an administrator could take must be fully evaluated and recorded.
The support of secured creditors is normally obtained. If possible, canvass the major unsecured creditors. It can be difficult for creditors to challenge a pre-pack if the alternatives are impractical and not shown to be cost effective.
Contact
Tony Forster Head of Business Matters
Martino Burgess Associate
Bonnie Thomas Graduate Member of the Institute of Legal Executives
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This article summarises areas of law on issues we believe may be of use to you. It is provided for information only. It is not a comprehensive review of the subject. It does not constitute legal advice. Accordingly, it is published without responsibility for any loss arising from any action taken or not taken as a result of it.