Benefits of Pre-Packaged Administrations
Preservation of Value
By selling the business and assets of a company through a pre-packaged Administration process, the Administrator can often achieve a higher price than if the assets were sold piecemeal.
This is a critical benefit of a pre-packaged Administration process and is largely achieved due to:
Speed of Sale
One of the primary advantages of pre-packs is the rapid execution of the sale. This swift process helps preserve the value of the business and its assets, which might otherwise deteriorate during prolonged insolvency proceedings.
The quick sale minimises the time the business spends in Administration, reducing the risk of losing key employees, customers and contracts.
Business Continuity
Pre-packaged Administrations facilitate the sale of the business as a going concern, allowing operations to continue with minimal disruption. This continuity helps maintain customer goodwill and protects the value of work in progress. In addition, to the extent that there is an outstanding debtor ledger at completion, the continuity of trade often results in improved recoveries.
By keeping the business operational, pre-pack transactions can prevent the loss of market share and maintain a company's competitive position.
Preservation of Brand Image
By avoiding the negative publicity often associated with other insolvency procedures, pre-packaged Administration transactions help maintain the business's brand image. This can be crucial for retaining customer trust and loyalty.
A strong brand image can also attract new customers and investors, contributing to the long-term success of the business.
Preservation of Jobs
Pre-packaged Administrations are particularly effective in safeguarding employment. Often, the employment of company staff transfers to the buyer on completion, under the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).
This transfer of staff not only protects livelihoods, but it also ensures the buyer has the expertise available immediately following completion and reduces the level of employee claims in the Administration, which would otherwise need to be met (in full or in part) by the Redundancy Payments Service.
Reduced Process Costs
Due to the expedited nature of pre-packaged Administration transactions, the costs involved are generally lower than those associated with a standard Administration procedure. Early due diligence helps to minimise expenses.
Higher Returns for Creditors
The combination of value preservation, reduced employee claims and reduced process costs often results in higher returns for creditors compared to other insolvency routes.
Flexibility and Control
Pre-packs offer insolvency practitioners and distressed companies greater control over the process, allowing for tailored strategies that enhance operational stability and meet specific stakeholder objectives.
Drawbacks of Pre-Packaged Administrations
There is extensive regulation and guidance for insolvency practitioners on how best to conduct a pre-packaged Administration process. Statement of Insolvency Practice 16 (“SIP16”) sets out the steps and efforts an insolvency practitioner must take before conducting a process of this nature, which largely address the drawbacks set out below.
Despite these regulatory safeguards, there remain some concerns to pre-packaged Administration processes.
Transparency Issues
The negotiations and sale occur behind ‘closed’ doors, often leaving creditors uninformed until after the deal is completed. This lack of transparency can lead to suspicions of unfairness, and undermine confidence in the insolvency process.
Potential Conflicts of Interest
When insolvency practitioners work closely with the company directors or are being appointed by floating charge holders - either of whom may have an interest in acquiring the business and assets through a pre-packaged Administration process - it can introduce potential conflicts of interest and raise questions about the fairness of the process.
Ensuring the insolvency practitioner acts impartially and in the best interests of all creditors is crucial to maintaining the integrity of the process.
Valuation Concerns
Particularly where the business and assets are sold via pre-packaged Administration processes to prior owners or connected parties, there is a risk it could be done so at lower value than what can be achieved on the open market.
This can result in lower returns for creditors and may be perceived as a way for directors to escape their liabilities at a discount.
Further, the cash runway of the business in a pre-packaged Administration process may result in there being a very limited timeframe in which to conduct the marketing exercise. This may result in sub-optimal market exposure and the value achieved for certain assets may be impacted accordingly, whereas in other insolvency procedures more time may be afforded to market the assets for sale.
Impact on Non-Preferential Unsecured Creditors
Non-preferential unsecured creditors often feel disadvantaged by pre-packaged Administration processes as they have little involvement in the process and may receive lower returns compared to secured and preferential creditors.
The lack of consultation with unsecured creditors can lead to dissatisfaction and a perception of unfair treatment.
Long-Term Economic Harm
Critics argue that pre-packaged Administration process can allow inefficient businesses to continue trading, potentially causing longer-term economic harm and that this practice might undermine market confidence and stability.
By enabling businesses to shed their debts and continue operating, pre-packaged Administrations can distort competition and create an uneven playing field.
Regulatory Framework and Reforms
The UK insolvency legislation provides a framework for pre-packaged Administrations, but has also been subject to scrutiny and calls for reform. The Insolvency Service has conducted reviews to assess the effectiveness and fairness of pre-packaged Administrations. These reviews aim to balance the need for business rescue with the protection of creditor interests.
The Graham Review
In 2014, the Graham Review was commissioned to examine the pre-packaged Administration process and recommend improvements. The review highlighted several areas of concern, including transparency, valuation and the treatment of unsecured creditors. It recommended measures to enhance transparency, such as requiring pre-pack sales to be reviewed by an independent third party.
Pre-Pack Pool
One of the key recommendations from the Graham Review was the establishment of the Pre-Pack Pool, an independent body that reviews pre-pack sales to connected parties.
A connected party is defined as “a person with any connection to the directors, shareholders or secured creditors of the company or their associates”.
The Pre-Pack Pool aimed to provide greater transparency and assurance to creditors that the sale is fair and in their best interests. While the use of the Pre-Pack Pool was voluntary, it was encouraged as a best practice.
Qualifying Evaluator Report
Whilst the Pre-Pack Pool offered a valuable independent stance on the proposed transaction, it did not have the power to affect the sale, and referral to the Pre-Pack Pool was low. Accordingly, new regulations came into force in April 2021 which made obtaining a Qualifying Evaluator’s Report compulsory.
Prior to a pre-packaged transaction being conducted to a connected party within eight weeks of entering Administration, a Qualifying Evaluator’s Report must be received by the Administrators. The only exception to this is if the Administrators have obtained creditor approval for the sale.
Conclusion
Pre-packaged Administrations offer a range of benefits, including speed, business continuity and higher returns for creditors. However, they also present significant drawbacks, particularly concerning transparency, potential conflicts of interest and the impact on creditors.
Balancing these pros and cons is crucial for stakeholders involved in insolvency proceedings. As the UK continues to refine its insolvency legislation, addressing these issues will be vital to ensuring fair and effective outcomes for all parties involved.
If you wish to find out more about pre-packaged Administrations generally, or feel like this process may benefit you in your current situation, contact a member of our team who can provide the right advice and help get you on the right path.
