Updated: 20th November 2020
When a company goes into administration, some or all of its assets may be sold so that funds are generated to repay creditors. A pre pack sale in administration differs slightly in that the underlying assets of a business are valued and marketed for sale prior to the administrator’s appointment.
The insolvency practitioner in charge of the sale is able to choose the most suitable buyer, which may be one or more of the existing directors. This type of sale offers advantages to all concerned. Trade often continues unaffected by bad publicity, jobs may be saved, and creditors should receive the best outcome in terms of dividends.
This insolvency solution has attracted criticism in the past, however, with many creditors being unconvinced of its ethical nature. The fact that a party connected to the failed business can purchase the assets, adds to a general sense of unease amongst creditors who may not even be aware that a sale is taking place.
A common assumption prevails that directors simply move from one failed business to take control of another company under a different name. Pre pack administration rules have changed to address these concerns, and to end a perceived lack of transparency within the system.
The new Statement of Insolvency Practice (SIP 16) and introduction of a ‘pre pack pool’ endeavour to encourage greater transparency, and consequently more confidence in the pre pack system.
So what are the new rules for pre pack administration, and how will they address these issues?
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A pre pack pool consisting of experienced, independent business people, has been launched. Tasked with scrutinising the circumstances of a ‘connected party’ pre pack sale, an individual pool member will offer an opinion on whether this is a reasonable option.
Connected parties are generally existing directors, shareholders, or members of their immediate family. Information provided by the connected party, often a director of the failed company, will be examined by a pool member whose opinion, although valuable as an independent viewpoint, does not have the power to affect the sale which ultimately remains in the hands of the administrator.
Applications to the pre pack pool cost £800 excluding VAT, and are made in confidence online.
The evidence to support an application includes, but is not limited to:
Two of the most important factors when considering ethics in a pre pack sale, are whether the assets were professionally valued, and if a detailed marketing strategy existed.
A viability review may be included with the pre pack pool application. This should describe the measures that will be put in place to ensure business survival for a minimum of 12 months, plus how business operations will differ in comparison with the failed company.
A viability review is of particular importance if payment for the purchase of assets is deferred, and offers more confidence in the company’s ability to trade profitably in the longer-term.
The pool member is expected to provide their opinion within 48 hours of an application being submitted. A pre pack sale by its very nature is a fast-moving process, and the maximum 48-hour timescale has been set to minimise delays or disruption.
There are three outcomes for an application to the pre pack pool:
Even if a pool member is unable to give a positive opinion, the sale remains in the control of the administrator. It is one of their duties under the rules of SIP 16 to justify any decision they make to the creditors, and any other interested parties.
For creditors to have confidence in the process, it is vital that the business assets are marketed correctly. A formal, well thought-out strategy is needed, with marketing outlets including online as well as traditional options, so a diverse audience is aware that the sale is taking place.
In their written statement to creditors, the administrator is required to explain in detail how the business was marketed. The avenues used, and length of time assets were on the market, will be heavily scrutinised by creditors.
SIP 16 calls for specific disclosure on various aspects of a pre pack administration. These include:
Unsecured creditors will naturally be looking for the highest possible returns on sale, and clear evidence that their interests have been put to the fore offers transparency in a potentially controversial process.
Pre pack sales offer a range of commercial advantages, not least of which is the preservation of business and jobs. It is a useful tool for business rescue, but does require close attention to creditor obligations.
Real Business Rescue has offices throughout the country and offers an initial consultation free-of-charge to discuss your situation in confidence.