Prepack Administration – what are the pros and cons?
Since 2015, Jones has been owned by Alteri, a private equity firm which invests in ‘stressed and distressed retailers’ that require restructuring. (Alteri usually invests in companies with turnovers of between 100million to 2billion euros for a period of up to 5 years).
Alteri purchased Jones and sister company, a value shoe chain, Brantano in a £12m deal in October 2015. Brantano, which was bought out of a prepack administration deal, has unfortunately just collapsed back into administration this week. Jones, which operates around 100 shops and concessions in department stores in the UK, employing more than 800 employees, was put up for sale in February 2017. There were apparently a number of offers, but none were able to reach a satisfactory agreement, and on 15 March, a notice of intention to appoint administrators was filed.
The notice of intention bought Alteri a 10-day stay against any further creditor action against Jones. On 27 March, it was announced that Jones was to be purchased by private-equity firm, Endless in a prepack administration deal that is reportedly worth £10.5 million. The deal means that Jones will briefly enter administration before Endless immediately buys its profitable stores and the brand rights. The 25 underperforming stores and six concessions that are not part of the sale will close immediately, which will result in around 262 job losses.
What is prepack administration?
Prepack administration has had some bad press in recent years. By nature, it is a closed process and this has the potential to antagonise creditors. When a company is in financial distress, an insolvency practitioner is employed to ready the businesses assets and prepare it for sale as soon as is practical and reasonable after the business formally enters insolvency.
What this means in practice is that by the time that the creditors are made aware of the sale, the sale has already taken place. Hence, from a creditor’s perspective, the ‘done deal’ can be perceived somewhat negatively. If you are a creditor and the money realised from the sale doesn’t cover the money owed to your business, that money will be written off in the deal, regardless. Unfortunately, the prepack process gives you no option to oppose the sale and the process before it takes place.
On the other side of the coin, what this does mean is that the sale of the business is likely to be agreed much more swiftly, which should save jobs in the long run. So, whether prepack is a good or a bad thing can very much depend on which particular side of the process you sit.
Prepack administration vs liquidation
In terms of insolvency procedures, administration accounts for only a small amount of all UK insolvencies and prepack even less. The chart below shows the distribution of compulsory liquidation, voluntary liquidation, company voluntary arrangements and administrations in the UK in 2016.We can see that by far the most widely used insolvency process is voluntary liquidation. In 2016, administration in fact only accounts for 9% of insolvencies. The graph below shows the data above for each year over the last six years:
Again, voluntary liquidation is consistently the most preferable process. Not only is administration a much lesser used insolvency process, this data shows that it has also decreased significantly in popularity in the last six years. In 2010, administrations accounted for 13.6% of all insolvency processes, by 2016 they account for only 9.2 %.
When not to use prepack administration
In our experience, the prepack administration procedure has a place, but usually isn’t the best option for smaller owner-managed businesses. Liquidation is a less expensive, more transparent procedure, that if done correctly affords all the usual protections, whilst potentially also avoiding the added cost of a TUPE transfer. In fact, in 2016, 32% of all administrations actually resulted in liquidation. It is our experience that creditors are more likely to react combatively when faced with a prepack as opposed to liquidation, which is more inclusive to creditors, and can achieve the same end goal.
If you are thinking about administration or liquidation and would like some tailored advice, dont’ hesitate to contact one of our business rescue experts directly. Alternatively, view some of our other articles listed here at the bottom of the page.