Pre-packs: trade secrets

A number of recent, high profile cases have cast a critical light on a
process used by most insolvency firms ­ the ‘pre-pack’. In short, this is where
a deal to sell the assets of a failing company is agreed prior to insolvency and
completed immediately after the appointment of administrators or receivers.

Many of the negative perceptions of the pre-pack process stem from the fact
that it can appear as if a business is failing and the next day, it is being run
as a new company with no liabilities, sometimes by the same individuals.
Creditors and shareholders assume the insolvency practitioner (IP) and the
directors have pushed through a quick deal which means they win and creditors
lose out.

An obvious point for the IP to make is that a pre-packaged sale of a business
does not absolve him from his duty to obtain the best price for the business in
question. A pre-pack does not miraculously sanitise a sale at less than full
value to insiders or existing management. A pre-pack is an insolvency process
and as such, a practitioner has to account for his actions to all creditors.

The introduction of a Statement of Insolvency Practice (SIP 16, on
pre-packaged sales by administrators) by the regulatory authorities has been
timely. The key to the SIP is the obligation to provide creditors with a
detailed explanation and justification of why the sale was undertaken so that
creditors can be satisfied the administrator has acted with due regard to their
interests. This includes a special mention of circumstances where connected
parties purchase the business out of the pre-pack process.

It also encourages the IP to inform the creditors and hold the first meeting
of creditors as soon as possible after appointment. This is the time when there
is likely to be a number of open questions from creditors about what happened.

A pre-pack is neither good nor bad in itself ­ what makes the difference is
what goes on behind the scenes to ensure the transaction pays off for all
stakeholders as far as possible. Most IPs will try to make sure they are signing
the right deal before anyone outside the process is aware of the sale.

The challenge for IPs is to get better at explaining the circumstances when a
pre-pack is the best means of preserving value for creditors and shareholders
and their role in the process. Although this has been best practice for most
IPs, the new SIP has clearly codified this.

Mike Jervis is a partner at PricewaterhouseCoopers

Related reading