What is a pre-pack?

Pre-pack is the term used to describe an arrangement whereby the sale of all or part of a company’s business and/or assets is negotiated and agreed before an insolvency practitioner (IP) is appointed, with the relevant documentation being signed and implemented, immediately or shortly, after the appointment is made.

Pre-packs are not a new insolvency strategy. However, a heightened awareness amongst creditors, other stakeholders and the media, means that pre-pack administrations have increasingly come under the spotlight in recent years. With an anticipated increase in corporate insolvencies as a result of COVID-19, pre-pack sales will no doubt be utilised and scrutinised more regularly over the coming months.

What are the pros?

The benefits of pre-packs include:

  • Business continuity

In most industries a break in trading will inevitably have a detrimental effect on a business. However, trading during insolvency may not be an option if, for example, no funding is available or it is not possible to comply with regulatory requirements. Pre-packs facilitate a quick and relatively smooth transfer of a business, allowing trading to continue uninterrupted.

  • Value protection

News of an insolvency appointment or financial difficulty can result in a reduction in the value of a business as customers, suppliers and employees lose confidence and look elsewhere. The risk of value diminution can be avoided by completing a pre-pack sale before news of the insolvency reaches the marketplace.

  • Job preservation

Cost cutting and reduced trading operations during insolvency can result in job losses. Job preservation is often one of the main reasons for using a pre-pack administration. Avoiding redundancies and securing continued employment for the employees of the business is not only of benefit to the economy generally, but also to the general body of creditors as it reduces the number and value of preferential and unsecured claims in the insolvency.

  • Reduced costs

The costs associated with trading a business in insolvency can be significant. As control of the business and the risks and costs associated with it are transferred to the purchaser immediately, or shortly after the appointment, the administrators can avoid incurring trading costs. Consequently, the costs of a pre-pack administration should be lower and result in a greater return to creditors.

What are the cons?

Before accepting an appointment, an IP requires to be satisfied that he can comply with his statutory duties and that a pre-pack sale is the most appropriate course of action in the circumstances. However, there are some criticisms of pre-packs, including:

  • Lack of transparency

Although secured creditors will usually be consulted in advance, unsecured creditors will not normally be informed of a pre-pack until after it has completed. As a result, unsecured creditors can feel disenfranchised and suspicious of the procedure.

  • Insufficient marketing

Creditors can be concerned that the maximum value for the business and assets has not been achieved as, due to the nature and timing of pre-packs, marketing opportunities can be limited.

  • Conflict of interest

The IP can be perceived as having a conflict of interest. He may be approached by the directors of a company who are already planning a pre-pack deal and may only secure the appointment if he agrees with the proposed approach.

Various measures have been introduced or proposed with a view to addressing these criticisms and providing greater confidence in the pre-pack process, including:

  • Statement of Insolvency Practice (SIP) 16 which, amongst other things, details the practice which IPs should follow when marketing and valuing a business and/or assets being sold by way of pre-pack administration and requires IPs to disclose a large amount of information to creditors following completion of a pre-pack sale;
  • The Pre-Pack Pool which can be approached by connected person purchasers on a voluntary basis to give an independent opinion on a pre-pack sale proposal; and
  • Draft regulations to require scrutiny of pre-pack sales to connected parties, published by the Government earlier this month, which prohibit an administrator from disposing of property of a company to a person connected with the company within the first 8 weeks of the administration, without either the approval of creditors or an independent written report by an evaluator.

Despite the criticisms and the negative press, it is recognised that pre-packs are a useful and valid insolvency tool which can provide the best outcome for all concerned in appropriate circumstances.


Louise Laing

Senior Associate