Pre-pack Administrations

What is a pre-pack?

A pre-pack is a deal for the sale of an insolvent company's assets which is put in place before the company goes into a formal insolvency process. Most commonly it is used in conjunction with the administration procedure. The deal will usually have been agreed before the Insolvency Practitioner is appointed, but will be executed by the Insolvency Practitioner shortly after appointment.


Why are pre-packs used?

If the conditions are appropriate, a pre-pack can be advantageous for all involved, and can be the best way of extracting value from a dire situation. Pre-packs mean a business can be sold without negative publicity, which could destroy the value of the business and lead to loss of customers and staff. This is often particularly the case with "people" businesses or regulated businesses which can generally not be traded in insolvency. Pre-packs are also used where there is a lack of available funds to keep the business trading while the administrator looks for potential buyers during the insolvency proceedings. Additionally, pre-packs can be used where the business has been marketed prior to formal insolvency proceedings, and it has become clear that the company's profits do not exceed its debts.


When did pre-packs develop?

Pre-packs are not new. They have often been used to sell businesses in insolvencies where commercial pressures require urgent action. However, there has been an increase in the number of pre-packs recently. This partly reflects the greater variety of insolvent businesses over the last few years.


What are the disadvantages of a pre-pack?

The main criticism of the pre-pack is that there is a lack of transparency in the process. Marketing of the business may take place but it isn't necessarily visible. In general creditors feel they are presented with a done deal. They say they haven't been kept informed of developments or been able to influence the Insolvency Practitioners' actions. Given these factors, it is inevitable that the process has sometimes been seen as opaque and suspicious, and there have been allegations that it has sometimes been used improperly. However, it needs to be borne in mind that Insolvency Practitioners are under a duty to try to secure the best outcome for the creditors, and frequently a pre-pack sale is the best way to achieve this.


Are pre-packs regulated?

There are no specific regulations which deal with prepacks, which can lead to a lack of confidence in the openness of the procedure. However, insolvency processes are under the ultimate control of the court, and Insolvency Practitioners themselves are heavily regulated both by statute and by the codes of practice of their professional bodies. If an Insolvency Practitioner is found by the court to have acted improperly he may be made liable for misfeasance. If he is judged to have acted improperly by his professional body, he will be subject to that body's disciplinary proceedings.


Should pre-packs be legally reformed?

It has been argued that judges should be involved in pre-pack deals, to confirm there is no wrong doing on the part of the IP or other parties involved. Some have suggested that only certain types of pre-packs should be subject to these conditions, for example when a business is sold back to management. The down side for both these measures is they would slow the process down, thus losing the advantage of speed. Judges are also reluctant to become involved in making commercial decisions, which are generally a matter for IPs, who have extensive experience in these matters.

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