Pre-packs are back but creditor assurance is vital

In recent weeks, pre-packaged insolvency sales (pre-packs) have been back in the news with high-profile transactions involving TM Lewin, Monsoon Accessorize, and Clintons. With the ongoing economic uncertainty, they will no doubt stay in the news for some time.

A pre-pack is where the sale of an insolvent company’s business is negotiated and agreed prior to the start of insolvency proceedings, but is then completed immediately or shortly after the proceedings start by the appointed insolvency practitioner (usually an administrator).

As you would expect, the insolvency practitioner has to work closely with a company’s directors to achieve a sale. But conflicts of interest can arise if the buying party is controlled by the very same directors who were in place when the company fell into insolvency.

Whilst a pre-pack can often provide the best solution for the survival of an ailing business and protection of jobs, they can often leave creditors with a sour taste in their mouths - especially when the business is sold back to existing management.

Even in these challenging and uncertain times, a pre-pack sale should meet certain minimum criteria. For example, creditors will want to be assured that:

• other options that may be more beneficial to them have been explored (such as a company voluntary arrangement);
• the business has been appropriately marketed;
• it was not possible to trade the business in administration and offer it openly as a going concern sale;
• values achieved for the assets are at least at or above break up values;
• sales terms in relation to any deferred consideration are reasonable from their point of view; and
• the directors have made a full and honest disclosure to the insolvency practitioner, particularly if it’s a connected party sale.

Where a sale does not meet these criteria and other benchmarks, all is not necessarily lost for creditors. 

We successfully recovered around £750,000 for creditors in the case of Ary Digital UK Limited, by suing the administrator in the High Court over the sale of three satellite TV channels for just £40,000. We also recently recovered more than £1m for creditors of a building business from its administrator, who had sold the business back to some of the existing management at a significant undervalue. 

In some cases, creditors just want the reassurance that the transaction was justified in the circumstances. An independent review by a liquidator can provide this. 

Our Special Investigations team specialises in contentious insolvency matters and can advise and support creditors caught up in a pre-pack. Please contact Mark Wilson for more information.