Prepacked value
SOURCE: SCOTTISH BANKER, DECEMBER / JANUARY 2008
Prepacks are becoming a more common way of disposing of a business in financial difficulty, mainly due to the increase in administrations as a consequence of the Enterprise Act 2002, but who benefits from this?
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. 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.
Among the criticisms of prepacks are that: the value of the asset is not being exploited; the creditors are disenfranchised because the deal is done without their agreement; there is a lack of transparency; and there is a bias towards the secured creditors.
On the other hand, those who use prepacks argue that there is benefit to creditors as a quick sale can enhance the value (particularly goodwill) of a business, they solve the problem of funding trading by an insolvency practitioner; and there are reduced costs – all important factors.
R3, the Association of Business Recovery Professionals, commissioned detailed research into this topic and recently published a preliminary analysis of pre-packaged 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 research 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 causes concern and general mistrust of the whole process (this is compounded as often prepacks involve connected parties).
There is some evidence to suggest that whilst that preferential creditors received significantly higher returns, prepacks often result in lower overall returns for unsecured creditors; although that aspect of the research is not conclusive and the situation may change now that HM Revenue & Customs rank as unsecured creditors.
There is clear evidence that prepacks perform better than business sales in preserving employment, and 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? Secured creditors will retain the protection of their security, and will often be involved in the prepack negotiations. A well prepared prepack should realise more value and preserve an ongoing business or part of the business, as opposed to the traditional alternative of a "fire sale".
The secured creditor should be prepared to work with the insolvency practitioner to ensure a quick decision can be made, provided, of course, that the value generated by the prepack of selling the business is likely to exceed the break-up value of the secured assets (which is something to be considered with alternative uses, and values, of property).
Banks should be aware of these procedures as they can assist both the Bank in preserving the value in its security, and the Borrower, to realise best value from its business.
author: alex innes