Prepacks
At our seminar late last year on ‘administration and the property industry’ we discussed prepacks. A prepack 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. Prepacks are commonly used in conjunction with administration. The deal is usually agreed before the Insolvency Practitioner is appointed but is carried out by the insolvency practitioner shortly after appointment.
Prepacks are not new and have been used for many years to sell businesses in insolvency where commercial pressure requires urgent action. There has however been an increase in the number of prepacks in recent years which has caused the whole procedure to be scrutinised more closely.
The increase in prepacks in administration has probably resulted from the increased use of administration following the introduction of the Enterprise Act 2002 which provided easier access to administration.
The question is whether or not a prepack is an appropriate and effective method of selling the business of an insolvent company bearing in mind the insolvency practitioner’s duty to obtain maximum value for the company’s assets for the benefit of its various stakeholders.
Numerous concerns have been raised and generally there is perceived to be potential for abuse. Those criticising prepacks claim that the value of the asset is not being exploited; that creditors are disenfranchised because the deal is done without their agreement; that there is a lack of transparency; and that there is a bias towards the secured creditors.
On the other hand, those who advocate the use of prepacks argue that there is benefit to creditors because prepacks can enhance the value (particularly the goodwill) of a business; they solve the problem of funding trading by an insolvency practitioner; and there are reduced costs – all important factors which benefit creditors.
R3, the Association of Business Recovery Professionals, commissioned detailed research into this topic and recently published a preliminary analysis of prepackaged administrations. The research looked in particular at how prepacks performed in comparison to other business sales by reference to a number of criteria including the return to creditors and employment preservation.
The main findings of the research make interesting reading. First of all the findings confirmed there is a clear trend toward sales of prepacks to connected parties in administration. Further research is to be carried out to see why this is the case, although, as already mentioned, easier entry into administration is certainly one possible explanation.
The research also highlighted that there are clear grounds for concern about the quality of information provided to creditors in all types of business sales including prepacks. Some reports are excellent but in other cases there is a distinct lack of information made available to creditors which in turn causes concern and general mistrust of the whole process.
There is some evidence to suggest that prepacks result in lower overall returns for unsecured creditors but that aspect of the research is not conclusive and the situation may change now that HM Revenue & Customs rank as unsecured creditors . The research data predates the scrapping of the HMRC preference and showed that preferential creditors received significantly higher returns from prepacks.
There is however clear evidence that prepacks perform better than business sales in preserving employment. Jobs are more likely to be saved with prepacks than with other business sales.
As always in these matters it is a question of balancing the interests of the various stakeholders. Is it more important to save jobs or pay creditors? As one commentator put it – “Who are more important, the Kwiksave employees or the Fairpack families?”
Further research is being carried out to obtain a more complete and accurate picture of trends relating to prepacks and to answer the questions which remain unanswered. In the meantime prepacks will continue to be used and the challenge will be to find the best way of managing the competing interests. We look forward with interest to the next report.
Rachel Grant is Chair of the R3 Scottish Technical Committee.
FOR FURTHER INFORMATION PLEASE CONTACT: GORDON HOLLERIN