With the recent collapse of a few retailers, including House of Fraser earlier this month, and retail parks and shopping centres changing their business structure and appearance with the rise of online shopping, it is time to remind ourselves of what a ‘pre-pack’ can offer to retailers when things go wrong.
What is a pre-pack?
The term “pre-pack” refers to an agreement to sell all or part of an insolvent company’s business and/or assets to a buyer (usually a new company) negotiated before an administration commences, with the administrators then effecting the sale to the buyer immediately after their appointment.
Pre-packs have received a mixed review from the media over the years but have nonetheless been used with success particularly in the retail sector.
Why are pre-packs so criticised?
Historically, the bad press surrounding pre-pack administrations arose from the suspicions of unsecured creditors who saw the management team stripping away valuable assets from a company, carrying on the same business in another company, but freed from their debts, whilst leaving onerous liabilities and debts behind in the old structure.
However, directors of an insolvent business cannot arrange a pre-pack without careful consideration of certain legal issues such as:
- their duties to provide the administrator with detailed information about the business, specifically to enable the administrator to make a proper assessment of its value (and so sale price);
- their risk of incurring personal liability for “wrongful trading”, where they cause a company to trade beyond the point at which there is no reasonable prospect of avoiding an insolvent liquidation. This potential liability cannot be extinguished by a pre-pack and therefore this risk must be carefully assessed and timed;
- their other obligations as directors of a company under the Companies Act 2006 (including non-profiting, care of creditors and other stakeholders of the business).
Since 2009, insolvency practitioners are also required to comply with transparency guidelines applicable to pre-pack administrations. These are called “Statement of Insolvency Practice 16” or SIP 16.
Under those guidelines, insolvency practitioners should disclose to creditors certain details of the deal, such as the name of the purchaser, the price paid and any connection the purchaser had with the former directors and shareholders, any valuations of the business or assets being transferred, the consideration for the sale and the terms of payment.
Administrators may face regulatory or disciplinary actions if they have failed to comply with SIP 16.
Right to challenge a pre-pack deal
Where a pre-pack is implemented by an administrator appointed out of court, often a sale will be completed before the unsecured creditors are aware of the pre-pack and have an opportunity to object. If the administrator is court appointed, the proposed pre-pack will need to be considered by the court and so creditors can make their objections to the court.
It remains however that a challenge to a pre-pack is extremely difficult, with the court generally placing reliance on the experience and judgment of the administrator if he favours a pre-pack.
Creditors also have a right to bring an action against an administrator if the administrator’s conduct has unfairly prejudiced the interests of the creditors, or where an administrator is not performing his functions quickly and efficiently. Again however, these are difficult tests to meet.
A quicker and cheaper way of challenging a pre-pack is to contact the Insolvency Service’s Pre-Pack Complaints Hotline. This may be used where creditors consider that they have been unduly disadvantaged by an administration (or any other corporate insolvency process).
What does pre-pack administration mean to a retail supplier?
Pre-pack administrations are not a perfect answer to everyone’s problem when a company is experiencing severe financial difficulties, but it is another tool available to owners or managers of a struggling business.
Overall, it is generally thought that pre-packs are a relatively quick and efficient way of transferring the business and/or assets of an insolvent company. They have a lesser impact on the costs involved compared with an administration. They can result in a better return for creditors, minimise disruption, save more jobs and limit the loss of goodwill with suppliers, customers and others. The latter is key for retailers who are heavily reliant on consumer confidence in their brands and assets.
For further details please contact our corporate/commercial team.
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