Pre pack Administration Examples

Recent examples of successful PP administrations include the following:

1. Debenhams: In December 2020, the UK department store chain Debenhams entered into a pre-pack administration, resulting in the closure of 124 stores and the loss of over 12,000 jobs. The brand was subsequently bought by the online fashion retailer Boohoo.
2. Caffe Nero: In November 2020, the UK coffee chain Caffe Nero entered into a controversial pre-pack administration, which allowed the company to close 30 unprofitable stores and renegotiate its rent agreements. The move was criticized by some landlords and creditors, who claimed they were unfairly treated.
3. Carluccio's: In May 2020, the UK Italian restaurant chain Carluccio's entered into a pre-pack administration, resulting in the closure of 40 stores and the loss of over 1,000 jobs. The company was subsequently bought by the Giraffe and Ed's Easy Diner owner Boparan Restaurant Group.
4. BrightHouse: In March 2020, the UK rent-to-own retailer BrightHouse entered into a pre-pack administration, resulting in the closure of all 240 stores and the loss of over 2,000 jobs. The move came after the company faced criticism for its high-interest rates and aggressive debt collection practices.
5. Victoria's Basement: In December 2021, the Australian homeware retailer Victoria's Basement entered into a pre-pack administration, which allowed the company to restructure its debts and continue trading. The move followed a difficult period for the company, which had been impacted by COVID-19 and changing consumer habits.

Advantages of Pre Pack Administration

Pre pack administration enables a quick and smooth sale of a business as a going concern without business interruption.

Pre packs can also protect the value of a business.  News of an insolvency appointment or financial difficulty can result in a reduction in the value of business assets; particularly the realisable value of book debts and work in progress.

Job preservation is often one of the main reasons for using a pre pack administration.  Redundancies are avoided and continued employment secured for employees. This is not only beneficial to the economy but also reduces the number and value of preferential and unsecured claims in the insolvency.

The substantial costs associated with trading a business during an administration can be avoided resulting in a greater return to creditors.

Disadvantages of Pre Pack Administration

Pre pack administrations have come under a lot of criticism in the recent past due to their lack of transparency.  Unsecured creditors are usually not informed of a pre pack deal until after it has completed, which can leave them feeling suspicious of the procedure.

Statement of Insolvency Practice (SIP) 16 was introduced in 2009 to try to address some of these concerns.  Licensed Insolvency Practitioners are required to disclose a large amount of information to creditors following completion of a pre pack sale.

Creditors frequently complain that the maximum value for the business and assets has not been achieved due to the nature and timing of pre packs which limits marketing opportunities.  Whilst an IP may test the market by identifying and contacting potential buyers, they are unable to fully expose the business/assets for sale on the open market without causing damage to the business.  Instead, the IP will usually need to rely on independent valuations.  Details of marketing activities and valuations must be provided in the information disclosed in the SIP16 report to creditors following appointment.

Conflict of Interest has also previously been brought into question.  SIP16 requires disclosure of the relationship between the IP and the insolvent company's directors prior to administration, the decision-making process, and why pre pack administration was chosen over other alternatives.  The IP must work in the best interests of the creditors, and disclose the identity of the buyer and any connection with the insolvent company or its shareholders.

SIP16 can be found here:

https://www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/sips/england/sip-16-e-and-w-pre-packaged-sales-in-administrations-2015.ashx

Pre Pack Administrations – New Rules

Despite SIP16, the absence of any court or creditor involvement meant that concerns over transparency in the process remained such as:

• creditors not being informed of the sale until it is presented to them as a fait accompli, and
• the sale of business and assets to a person who is connected to the insolvent business or company, such as a director.

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 was introduced on 30 April 2021 with the aim to provide creditors with reassurance that pre-pack sales to connected parties are fair, appropriate and transparent.

The regulations restrict an administrator making a “substantial disposal” of a company’s business or assets to a “connected person” within the first 8 weeks of administration unless they either:

• obtain approval of the transaction from creditors, or
• have received and considered a report obtained by the connected person from an “evaluator” on the reasonableness of the proposed disposal

The guidelines can be found here:

https://www.gov.uk/government/publications/requirements-for-independent-scrutiny-of-the-disposal-of-assets-in-administration-including-pre-pack-sales/requirements-for-independent-scrutiny-of-the-disposal-of-assets-in-administration-including-pre-pack-sales

The Act can be found here:

https://www.legislation.gov.uk/ukdsi/2021/9780348220421/contents

Pre pack Administration Process

Subject to the above new rules, the pre pack process is as follows:

• A company under pressure from creditors is threatened with receivership or liquidation.
• A licensed insolvency practitioner (IP) is contacted to discuss the situation and provide a range of possible options.
• If pre-pack is decided upon, the IP will arrange for company assets to be valued and prepare a Statement of Affairs.
• If the business is to be sold to an existing company, steps will be taken to ensure the buyer has the necessary funds.  Management accounts and other information will be obtained to ensure the business is viable.
• If the intention is to sell the business to a new company, or 'newco,' cash flow, profit and loss, and balance sheet forecasts should be provided to demonstrate the viability of the new company and their ability to purchase the assets.
• The company is placed into administration, suspending all legal actions against them, and the company's assets are sold immediately.
• The administrator will arrange a creditors' meeting to explain the reasons for taking this insolvency route.  A recommendation for liquidating the company is often given and ratified by creditors.
• The company is placed into liquidation and creditors are repaid pro-rata with funds received from the liquidated assets.