With the rising number of retailers going into administration, the pre-pack administration has becomeA popular method of buying up a failing retail brand.
But let’s discuss its advantages and disadvantages and what it entails.
What is a pre-pack?
Pre-packs are not new but have become more widely used. A pre-pack refers to an arrangement where some or all of a company’s business or assets are sold by an administrator (an insolvency officer) where the negotiations with the purchaser have taken place before the administrator’s appointment. Sometimes the purchaser is the existing management team or even an existing owner.
Benefits of a pre-pack
Being able to cherry-pick the best assets of a well-known business and retain its best staff, whilst continuing to trade, without having to take on the existing liabilities to creditors, is clearly attractive to potential buyers and existing management is likely to be supportive. This no doubt explains the number of completed pre-packs and potential pre-packs that have been widely reported in the press.
Why the retail industry?
Pre-packs are well-suited for the retail industry, since they are useful where staff and brands are important to a business and speed is essential in keeping a business together. The traditional process in an insolvency of marketing a business after first commencing an insolvency process can be very damaging where the retention of key staff or keeping key suppliers on side is critical, or where maintaining brand image is essential.
With a pre-pack, more jobs are likely to be saved. The alternative of a cessation of the business and the sale of assets in a liquidation is also likely to produce a poor return for the creditors.
Whilst a pre-pack will usually require the co-operation of the secured creditors, unsecured creditors are only likely to become aware of the pre-pack after it has occurred. This is because an administrator is only required to provide creditors with information about the sale after the event.
This has given rise to suspicions of cosy deals, particularly as there will have been limited marketing to avoid the dire financial position of the business becoming widely known.
To address these concerns, professional guidelines were amended so as to require an administrator to give more extensive information to creditors regarding a sale. Those guidelines now contain more demanding standards for advertising a business for sale in a pre-pack and require the reasons for the marketing strategy adopted by the administrator to be explained to the creditors.
Is a Company Voluntary Arrangement an alternative
Where the directors have the support of creditors then a company voluntary arrangement may allow the business to continue without having to be sold. Provided over 75?per cent of creditors are supportive then a company voluntary arrangement will allow the company to reschedule its debts such as the rent it has to pay for its premises.
However, the publicity of this process and the need to persuade creditors that the debt restructuring is in everyone’s interest may be counterproductive to the survival of the business. For these reasons we can expect more pre-packs in the retail industry. In any event, the directors should take appropriate legal advice.
Ed Marlow is a Counsel in the banking and restructuring team in the London office of international law firm Bryan Cave