Pre-packs
Creditors are often surprised to find that the business has been sold to the existing management team so quickly following the appointment of an IP. From their perspective the business appears to be trading as normal but they have no recourse to the new owners for the payment of their debts.
However there are normally reasons why a pre-pack is undertaken;
Limited market – the IP considers that the nature of the business will make it difficult to find parties interested in buying it;
Funding – to market a business it needs to continue to trade. A newly appointed IP may not have access to any funding and this may prevent the business from continuing to trade whist in the insolvency procedure. In this scenario the IP may only have 2 options; to shut the business and sell the assets on a break up basis or to sell using a pre-pack. The latter of these options will normally yield the highest returns and minimise employee claims.
Likely reaction of customers – if customers are likely to change suppliers then there may be a reason why trading the business in an insolvency process may not be realistic. There will also be the issue of after sales services and warranties for products sold by the business in Administration or Receivership.
Termination of contracts – some customer or vital supplier contracts may terminate upon the insolvency of the business or the other party may have the option to terminate the contract to their benefit. This is less likely to happen if there is a seamless transfer of the business.
Landlord issues – If there is an aggressive landlord then it may be difficult to remain in occupation of a property. A quick transfer of the business and lease may reduce this problem.
Management team – in certain businesses the management team or employees are vital to its continuation. If these employees are likely to leave the business should it be sold to another party then the only way of extracting value for goodwill would be through a pre-pack. This scenario is most likely in ‘people’ or services businesses.
Whilst it is possible to abuse the pre-pack process, it is a vital part of the recovery and rescue industry. The pre-pack provides benefits to the exiting management and to creditors through a better return.
