6 August 2010 by Matthew Miller

Pre-packs: the lesser of two evils?

Pre-packs have been in the news a fair bit during the recent economic downturn. A pre-packaged sale in administration, or “pre-pack”, is a sale of all, or part, of the business/assets of an insolvent company negotiated immediately before the company goes into administration and completed as soon as the administrator is appointed. Usually the sale is not approved by the creditors of the insolvent company or the court.

Pre-packs have been criticised for lacking transparency, giving little opportunity for creditors to object and, as a result, favouring the buyer of the relevant business/assets at the expense of the creditors. Sales of assets to the management teams of insolvent companies, or other “connected” parties, have come in for especially heavy criticism.

Press coverage probably peaked last year when in the space of 2 weeks Whittard of Chelsea, and fashion retailers USC and The Officers Club were all sold back to their original owners, via the pre-pack process, leaving behind their debts and unprofitable assets. Unsurprisingly, when they found out, the creditors were not happy bunnies.

However pre-packs are by no means illegal in fact, in appropriate situations, they are encouraged by the courts. A key benefit is that the business of the insolvent company can be sold and start to trade again very quickly, the goodwill and value of the business is preserved and any damage caused by negative publicity is minimised. Often this also means that the employees keep their jobs. Compared to administration and liquidation pre-packs are also quick and cheap and may be the best and only solution if the administrator cannot source any finance to trade the business from administration.

Nevertheless there is clear evidence that creditors, especially suppliers, are losing out in a big way. Some are trying to fight back notably HM Revenue & Customs, often one of the biggest ‘victims’ of any pre-pack sale. For the creditors it is difficult to see beyond the fact that business owners can shake off debts by putting their business into administration and then immediately buying back only the parts they want to keep.

There is an obvious conflict with the duty on insolvency practitioners to obtain maximum value for the company’s assets so as to benefit all stakeholders i.e. the creditors and the business owners. The Insolvency Service has sought to address some of the criticism – insolvency practitioners conducting pre-packs now have to follow more closely prescribed procedures, to try and improve transparency – but the perception remains that there is still too much scope for the process to be abused (and that it is being abused).

Those who advocate the use of pre-packs acknowledge the impact on suppliers and other creditors, but argue they are the lesser of two evils. To put it another way, is it more important to save jobs or pay creditors? That particular argument is likely to run and run.

1 July 2010 by Vincent Billings

Shareholders protecting your position – Shareholders Agreements for minority and majority shareholders

Whether you are a minority shareholder or a majority shareholder in a company, an issue to consider at an early stage is how to contractually protect your position within the company.

9 July 2010 by

Repent at leisure

While break clauses in leases are a subject that we have addressed previously, a recent case highlighted the importance of not only complying with any preconditions set out in a lease but also considering the lease as a whole and, in particular, the not so obvious issues.

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