Pre-Pack Administration

A pre-pack administration sale is a formalised way of selling a business to a third party or the existing directors if the business has financial problems and/or is experiencing pressure from its creditors.  A pre-pack administration is only appropriate where there is a need for some urgent action to protect the value of the business (for example, the company is under pressure from creditors and is being threatened with a compulsory liquidation).

The sale of the business happens immediately before or after the company enters administration. The administrator then reports to creditors that the business has been sold as part of his proposals to creditors.

An insolvency practitioner (“IP”) would be engaged by the directors, shareholders or lender to explore the feasibility of a business undertaking a pre-pack process.

Where the purchaser is a connected party, the administrator may only proceed if the sale is either approved by creditors or the purchaser obtains a report from an evaluator.  It is intended that evaluators will be an insolvency practitioner, accountant, lawyer or valuation agent, but an evaluator must have relevant knowledge and experience.

Where the sale is to be approved by creditors, the approval occurs at the same time as the administrator seeks approval of his proposals and will dealt with by the administrator.

An administrator is also required under the regulations of Statement of Insolvency Practice No 16 to disclose various matters to creditors to ensure creditors are satisfied the decision to undertake a pre-pack process was the best option available to the company.

SIP16 has a number of key compliance standards:

• The IP should be clear about the nature and extent of the role of advisor in the pre-appointment period.  Normally an IP is instructed by the company and therefore the directors and any parties connected with the purchaser should be encouraged to take independent advice.
• The IP should bear in mind the duties and obligations which are owed to creditors in the pre-appointment period.
• Valuations should be obtained by an appropriate independent valuer.
• Marketing a business is an important element in ensuring the best available consideration is obtained for the interests of the company’s creditors as a whole and it will be a key factor in providing consideration to creditors.
• In respect of marketing the IP should have due regard to the marketing essentials set out in the SIP.

The following disclosures (from SIP16) provide a basis to the considerations an insolvency practitioner must undertake before agreeing to proceed:

• The source of the administrator’s introduction to the business.
• The extent of the administrator’s involvement prior to his appointment.
• Details of marketing activities undertaken by the company and/or the administrator.
• Valuations of the business or underlying assets including the qualifications of any independent valuers.
• What alternative courses of action have been explored by the administrator?
• Why it was not appropriate to trade the business and offer it for sale as a going concern during the administration.
• Details of efforts made to consult with major creditors.
• Details of the assets involved and the nature of the transaction.
• The consideration for the transaction, terms of payment and any condition of the contract that could materially affect the consideration.
• If the sale is part of a wider transaction, a description of the other aspects of the transaction.
• The identity of the purchaser, and whether there is any connection between the purchaser and the directors, shareholders or secured creditors of the company.