In the last three years, companies of all shapes and sizes have had to contend with a plethora of challenges that have severely tested the balance sheet and put a strain on even the best run businesses. Brexit, a global pandemic, geo-political tensions, a cost-of-living crisis, record inflation, rising interest rates, and crippling energy prices, have all been layered on top of each other to create a bruising trading environment for many.
The simple fact is, demand in certain sectors has fallen and is slowly recovering, the cost of business has shot up, and the job of getting things done has become more time consuming and onerous. It’s little wonder that a significant proportion of SMEs have accumulated considerable liabilities during this period and have reached the point where a different course of action is needed, in order to secure the long-term future of their business.
Step in, pre-pack administrations. Loved by some, loathed by others (namely creditors), pre-pack administrations haven’t always had the best reputation, because the sale of the business and assets is often completed before the creditors of the insolvent company are even aware of the administration.
Post-COVID, many predicted a resurgence in ‘pre-packs’, which has yet to materialise, but with much of the Government support brought on by the pandemic now at an end, the restructuring tool remains a viable and useful mechanism for securing the future of those businesses that are fundamentally sound, but have been weighed down by debt and outstanding liabilities.
So what are ‘pre-packs’ and how can they help businesses looking to restructure?
What is a pre-pack?
The term ‘pre-pack’ is used to describe the process whereby the business and assets of a company are sold, via administration, in an arrangement that is typically negotiated in advance of the company concerned formally entering into an insolvency process. The buying party is often (but not always) connected to the company (e.g. a new company formed by the existing directors of the company in administration).
Essentially, the process allows a valid business to survive whilst relieving it of creditor pressure but also ensuring that its assets are realised for proper value. It’s the latter aspect of that equation that has been an area of concern for some and which reforms brought in two years ago were focused upon – tightening up regulatory intervention and introducing more accountability.
When is a pre-pack appropriate?
‘Pre-packs’ can be a really effective tool for all concerned when they’re used in the right way. Typically, they’re used where a company has a good underlying business but is struggling to meet its ongoing liabilities – it’s not uncommon for there to be an imminent threat of, for example, a winding up petition, or a cessation of supplies/services which would damage the business.
Administered properly, pre-pack administrations create a virtually seamless transfer of business and assets from the insolvent company to the purchaser. This can have significant benefits for the majority of stakeholders involved, because it allows for a high level of continuity. The business can continue trading under the same name (subject to compliance with section 216 of the Insolvency Act and its associated provisions), often from the same premises, and with the same staff. This means that the underlying business retains value, which is ultimately good news for all involved (especially when compared to the potential outcome, for example, in a liquidation). For those reasons, where they are viable, ‘pre-packs’ have always appealed to struggling businesses.
During the COVID-19 pandemic, the Government put in place a significant number of measures to support businesses, including those in the Corporate Insolvency and Governance Act, aimed at protecting businesses during the pandemic, providing much-needed respite for struggling companies. Those protections and safeguarding measures have now largely gone, leaving many businesses still exposed to the economic headwinds, which is where pre-pack administrations can play a part.
Key considerations
There are a number of important questions to ask and considerations to be made when exploring the option of pre-pack administrations.
- While ‘pre-packs’ allow you to ‘drop’ your debt at the point at which the company enters administration, allowing the business to continue trading without those liabilities, it does not remove the pressures that continue to face businesses, such as rising interest rates and energy bills. While you may be able to remove the historical arrears that have been saddling the business, you still have to ensure that you have sufficient means to meet any liabilities in the future, such as the general costs of running a business. As such, carefully consider what these may be moving forward.
- Focus on customer contracts. Following a ‘pre-pack’, these could be terminable and in any event, will need to be assigned or novated to the new company, so it’s important to consider customer relationships and whether they would support the new business following administration.
- The same can be said for suppliers. Think carefully about key supplier relationships and the likely impact of a ‘pre-pack’ on them, in terms of outstanding liabilities.
- It’s extremely likely that the ‘new’ business will need to explore lending options moving forward, so it’s important to look at your current banking and lender relationships as well. Quite often, lenders will not support a business post-pre-pack, particularly if they’ve been left exposed. As such, in many cases, businesses will need to secure new banking facilities elsewhere.
- It’s important to consider your employee position, before embarking on a pre-pack administration. Typically, in the event of a ‘pre-pack’, all staff will TUPE across to the new business, but ensure you seek professional advice about dealing with employment issues as part of the process.
- As a business, if you rely on equipment that you’ve rented as part of a hire purchase agreement for example, it’s essential to note that those terms and conditions will be with the old company that’s going into administration, so thought needs to be given to future arrangements.
- Property must also be taken in account – are you in leased premises? Again, those terms will be held with the old company and will potentially need to be renegotiated.
- The vital thing to remember throughout the process is that nothing is free. In order to buy the business out of administration you will need to pay the administrators for the assets that are being transferred. In an insolvency scenario, it may well be the case that the price of the business will be lower than if you were buying it solvently on the open market, but it still needs to be funded. In addition, it’s important to note that administrators are not obliged to sell to the previous owners. In the event that a competitor gets involved in the bidding process, the price may be driven up.
Pre-pack administrations have a valid part to play in securing the long-term future of businesses, but there is a lot to consider before going down the route of a ‘pre-pack’. Now is the time to go through your options, taking into account the future economic outlook. With interest rates and energy bills still creating significant ongoing liabilities for companies, which will not necessarily be taken away by a pre-pack administration, it may pay to wait for the waters to calm before embarking on your ‘pre-pack’ journey.
If you’d like to discuss the blog in more detail, contact me on (0) 7920 237687 or email daniel.clarke@pannonecorporate.com