What are the benefits of a pre-pack arrangement?
In a company administration the term "pre-pack" is a restructuring strategy where the administration procedure is used to sell the business and assets of an insolvent company to a new company under an arrangement agreed prior to the appointment of an administrator. The sale is usually effected immediately upon the appointment of the administrator.
While the sale of a firm and its assets under a pre-pack normally sees the business sold as a going concern – one that is expected to continue to trade - in some cases the transaction may only involve some or all of a company’s assets . A separate pre-pack sale may then take place for the remaining assets/business or the company may enter the process of liquidation.
The primary objective of the administration procedure is that of the rescue of the company. Pre-pack administrations continue to be a controversial topic however there is no doubt that they are a useful tool for the insolvency practitioner in achieving this objective.
There are a number of benefits to a pre-pack arrangement:
Continuity of business
A pre-pack can help to facilitate the transfer of a business in a smooth and efficient fashion, while acting to reduce the costs of administration – a situation that should result in higher returns for creditors.
Maintaining good business and employee relationships
While insolvency proceedings may act to erode employee, customer and supplier confidence in the business whilst the Insolvency practitioner seeks a potential buyer, pre-packs can help alleviate concerns by maintaining ongoing and seamless relationships.
A pre-pack will often allow the transfer of existing employees to the purchaser via the application of The Transfer of Undertakings (Protection of Employment) Regulations (SI 2006/246) so protecting the accrued rights of the employees and their jobs. An administrator seeking a buyer will often be constrained by funding issues to running the business on a skeleton staff.
Often the administrator may not be in a position to obtain funding for trading. The alternative would be staff redundancies and to place the company into liquidation.
Whilst there is a common misconception that all pre-packs are sales to connected parties research into the procedure has proven this to be untrue. Even if the business or assets are sold to a connected party the insolvency practitioner has a duty to ensure that the sale is at a fair market value.
It should be remembered that in a pre-pack situation the business was already insolvent prior to any appointment and a protracted process ending in liquidation could have been the alternative with the loss of many more jobs