What is a Pre pack Sale in Administration in the UK?

A Pre pack Sale is the sale of all or substantially all of the business and assets of a company that has previously entered into Administration. The sale quite often takes place on the first day of the Administration as the marketing of the business and negotiation of the sale terms has taken place prior to the appointment of the Administrator. Hence the “pre-packaged” nature of the transaction. A Pre pack is sometimes known as an “accelerated M & A” process.

An Administration is a formal insolvency process in which a company can quickly get protection from its creditors, giving the directors, working with the Administrator, time to restructure the company’s affairs or dispose of the business and assets for the benefit of the company’s creditors.

The formal legal process is governed by the Insolvency Act 1986 [the Act] and The Insolvency Rules [England and Wales] 2016 [the Rules] for companies that are incorporated in England and Wales. The legislation relating to companies incorporated in Scotland and Northern Ireland is very similar to the law in England and Wales.

A Licensed Insolvency Practitioner [LIP] will act as Administrator [an Officer of the Court in such circumstances] and will often have acted as advisor to the company in the run up to Administration.  A LIP is an individual licensed so able to act by one of a number of licencing bodies. The bodies with the largest numbers of licence holders are the Institute of Chartered Accountants in England and Wales [the ICAEW] and the Insolvency Practitioners Association [the IPA]. 

It is important to note that the Administrator has full executive powers and wide-ranging statutory powers to run the affairs of the company. He/she can allow directors to exercise executive powers, if considered appropriate.

Key benefits of a Pre pack Sale

In summary, the key benefits of such a process are that it:

1. Preserves value for creditors often leading to higher rates of debt recovery
2. Avoids a damaging hiatus period between the commencement of Administration, with all the uncertainties that such a process entails, and the sale of the business
3. Can be done quickly and efficiently
4. Ensures that Employee contracts of employment are preserved and will automatically transfer to the purchasing company
5. Boosts customer confidence and business continuity
6. Protects Brands and Intellectual Property Rights 

The perception problem

It is estimated that well over half of all Pre pack Sales since the Administration procedure came into effect in 1986 have been to connected parties i.e. to the existing management or their associates. This has led to justifiable concerns regarding the opaqueness of the process leading up to a sale.

As a result of the sale taking place in a short timescale, there is usually not enough time to consult with creditors. On occasion, there is not the ability to openly market the business because of competitor concerns and the potential loss of key staff, particularly in the service sector, resulting in the likely negative impact on ongoing operations. Accordingly, certain parties, including creditors and indeed potential buyers of the business, may consider that the best possible price has not been obtained in such circumstances.

The Pre pack Pool

In an attempt to allay fears in the business community regarding such transactions, the Government, in 2015, introduced voluntary measures which sought to address the concerns of all stakeholders around the Pre pack Sale practice. The Government introduced a “pre-pack pool” of experienced business people who would review the sale to connected parties and provide a written report within 48 hours providing an opinion, which could be that the sale was reasonable, or a qualified opinion that notwithstanding a lack of certain information, the sale appeared reasonable or a negative opinion that there was not enough evidence to suggest that the sale was reasonable.

The problem has been that the referral to the pool was voluntary and was simply ignored by connected party purchasers.

The Administration [Restrictions on Disposal etc to Connected Persons] Regulations 2021 [the Regulations]

Eventually, the Government decided it had to act and accordingly on 30 April 2021 it brought into force the Regulations which apply to all companies.

The key features of the Regulations are:

1. The Regulations are mandatory
2. They apply to all companies regardless of size
3. They apply to sales within 8 weeks of the commencement of the Administration to connected parties [the definition of connected parties includes all directors and their associates]
4. A sale to connected parties cannot take effect unless the creditors have approved or a written report on the proposed sale [the Pre pack Report] has been submitted to the Administrator by an independent individual with appropriate business experience, referred to as the Evaluator
5. The Administrator must be satisfied that the Evaluator has sufficient relevant knowledge and experience to make such a report
6. The Evaluator must be covered by Professional Indemnity Insurance
7. The Evaluator’s report must include in his/her report a statement that he/she is satisfied that the sale is reasonable [a case made opinion] or a statement that he/she is not satisfied that the sale is reasonable [a case not made opinion]
8.  The Pre pack Report is to be obtained by the connected person
9. The connected person can obtain more than one Pre pack Report
10. The Administrator can still sell to a connected party notwithstanding that the Pre pack Report may contain a case not made opinion but he/she must provide a statement setting out the reasons for doing so
11. The Administrator must send a copy of the Pre pack Report [or a redacted version] to Companies House and the creditors at the same time he/she sends a copy of his/her statement of Proposal to creditors [which must be no later than 8 weeks after the commencement of the Administration]

In conclusion

Used correctly, and in reality, the noise surrounding concerns about Pre pack Sales have largely been driven by the political community, Pre pack Sales remain an essential restructuring tool helping to preserve viable businesses and jobs. LIPs have always had to defend their actions and sales to connected parties are no exception. Such sales invariably attract interest from the bodies that licence LIPs and accordingly, a sensible Insolvency Practitioner will always approach such transactions with a high degree of scepticism and scrutiny.