As mentioned above, this article will be looking into pre-pack sales, providing advice for company directors considering the procedure.
What is pre-pack administration?
A pre-pack administration is a business recovery process where a company enters administration with a purchase price already agreed in principle for the assets of the business. This is beneficial to creditors for a number of reasons:
- The sale will be made at a time when the business can continue trading, therefore holding the highest possible value.
- Jobs are preserved with employees being subject to TUPE reducing the overall level of claims.
- There are no costs of the administrator having to trade the administration.
- Dividends should be made to creditors in a shorter timescale.
Unfortunately, these benefits are not always clear to creditors and a number of insolvency firms have failed to adequately justify to creditors why the pre-pack was in their best interests. The result of this was the recommendations included in the Graham review. The recommendations featured more transparency on the actions taken by the insolvency practitioner prior to the sale and the introduction of the pre-pack pool.
Transparency of pre-pack administration
At all times, the insolvency practitioner must be seen as independent in the process. They must avoid actual or perceived conflicts of interest. In the recent case of VE Vegas Investors IV LLC and others v Shinners and others  EWHC 186 (Ch), it was established that the administrators had a conflict of interest. This was based on how they advised on the pre-pack and should be removed from office.
The first major issue was that they had taken instruction for the administration from the directors, rather than the company. Whilst an instruction can be taken to assist in placing a company into administration from the directors, this cannot be accompanied by specific advice on applying a pre-pack asset purchase. In order to add credibility to the sale, a director will need to instruct an insolvency practitioner to assist in placing a company into administration. They must also seek assistance from another professional or solicitor in tendering to buy the business as a pre-pack.
An insolvency practitioner has a duty to investigate the actions of the company directors and this includes any pre-pack asset sales. If they are advising the directors on anything other than setting out the basic process of the pre-pack administration, ie tailored advice on how to beat the competition, this is a self review threat. This means the insolvency practitioner would have a significant conflict of interest causing creditors to question the legitimacy of the transaction to the new business.
Valuation and marketing for a pre-pack asset sale
An independent valuation of the business and its assets should be carried out at an early stage of the pre-pack administration process. This must be conducted by a professional valuer with appropriate professional indemnity insurance. The valuation will generally set off 3 bases of valuation:
- As a going concern at the same premises. (Highest value)
- As a going concern at new premises.
- On a break up basis. (Lowest value)
Where a company ceasing to trade will often be sold on a break up basis, if a pre-pack asset sale can be arranged, the offer would be expected to be in the region of the higher end of the valuation. When you hear about high profile insolvencies and administrator’s suggesting no satisfactory offers have been received to save the business, it likely means they are closer to the lower valuation. Therefore, more money can be made available for creditors on a break up basis.
The business must then be marketed to ensure the best offer possible has been obtained. This can be done by contacting as many interested parties as possible. The Graham review set 6 key principles with which businesses should be marketed for a pre-pack sale:
- Broadcast to reach the largest possible audience for the type of business.
- Justify the methods to market the business.
- Carry out further marketing even if some was carried out even before instructing an insolvency practitioner.
- Actively promote the marketing rather than just publishing.
- Include internet marketing.
- Provide justification if the above methods are not used.
The pre-pack pool and viability reviews
To add an extra layer of backing for connected party pre-pack asset sales, voluntary provisions were introduced. This is for the prospective purchaser to approach the pre-pack pool and prepare viability reviews. The comments of the pre-pack pool and copies of the viability reviews would then be included in the administrator’s initial report. If the approach is not made, the administrator must tell your creditors this. Subsequently, they should explain the reasons the sale still went ahead in the event it did.
Based on the level of disclosure to creditors, if you are trying to add credibility to the new company, it is clearly in your best interests to take these voluntary actions. The viability review should set out how the new company would operate differently from the old company, and how it would survive for the next 12 months. The statement need only be around 500 words and can include cash flow or profit and loss forecasts to support the claims. However, they are not a requirement.
The pre-pack pool is a panel of independent business people to give an opinion on the proposed asset sale. All the information is submitted by way of an online application and a fee of £800 plus VAT is payable to the pre-pack pool. They will request the viability statement you have prepared for creditors and details of the proposed sale along with:
- Details of the connection between the company and the purchaser.
- The reasons behind the pre-pack sale.
- The accounts for the business.
- Any winners and losers from the sale.
- Steps taken to avoid insolvency.
- Whether personal guarantees are being given to support the purchase.
On receipt of the decision the pre-pack pool will return a recommendation whether the sale should go ahead in its current form, with modifications or does not represent the best possible outcome. Following the pre-pack pool’s advice will add a large amount of credibility to the sale, as will the disclosed report being that it is coming from an independent third party.
Pre-pack administrations have their place as an extremely useful business recovery too. As set out in the Graham review, if the voluntary processes are not adopted new legislation may be introduced to govern pre-pack sales. This is likely to introduce additional costs to the process from the regulatory burden than currently exist.
Our business rescue experts can assist you with the administration process in a way that will maintain credibility whilst going through a business recovery process.