“Pre-Pack” describes a process through which a company is placed into administration (“old co”) and immediately its assets are sold to another company under a sale that is normally agreed prior to the Administrators being appointed. 

Often the purchasing company of Old Co’s assets has the same directors, shareholders or managers of Old Co, but this is not always the case and certainly does not have to be the case.

There has been a lot of criticism in the past years over “pre-pack” sales with people complaining that there is a lack of transparency for the creditors of Old Co who often know nothing about the Administration or the sale until after it is completed, there has also been criticism that “pre-packs” do not maximise returns for creditors and obviously creditors do get upset at the thought that the purchasing company has emerged with perhaps the same personnel but having got rid of all Old co debt.

Pre-packs do have benefits; one of the main benefits being that a relatively smooth transfer of a business to others can often reduce costs as opposed to an Administrator trading the business in turn increasing costs and thereby reducing the amount payable to creditors. Further jobs can be saved not to mention contracts with third parties that might otherwise have been brought to an end.

Leanne Schneider-Rose, Partner in the Restructuring and Insolvency Department at Sydney Mitchell says  

purchasing out of a Pre-Pack sale can be very different to purchasing a company that is not insolvent one of the main differences being that a purchasing company is unlikely to obtain any warranties or indemnities from the Seller (Administrators) and it is often difficult to obtain or carry out very much due diligence in advance of the purchase.  Quite often if the purchasing Company consists of the directors/shareholders or managers of the old co this will not be an issue since they will have more knowledge of old co than the Administrators in any event; however the lack of any warranties/indemnities from the Seller should be reflected in the offer being made.

Pre-packs will also necessitate consideration of the impact of TUPE by all parties.  Jade Linton, Solicitor  in the Employment Department at Sydney Mitchell says  

TUPE - which stands for Transfer of Undertakings (Protection of Employment), is designed to protect employees where a business changes hand, by moving the employees and any liabilities associated with them from the old employer to the new employer. The new employer is not entitled to cherry pick from the employees eligible for transfer and therefore it is important for buyers of pre packs to be aware of their obligations particularly because it is unlikely in cases of pre pack sales that the administrator will offer the purchaser any indemnities against potential employee liabilities that might arise out of the transaction which can result in unforeseen tribunal claims.

Leanne and Jade between them have a wealth of experience in acting for Administrators and purchasers alike in pre packs; if you are considering making an offer for a business on the basis of a “pre-pack” sale or have had an offer accepted contact Leanne on 0121 698 2200 or Jade on 0121 746 3300.

Jade Linton

Jade Linton, Solicitor, Employment Law Specialist
j.linton@sydneymitchell.co.uk, 0121 698 2200

 

Lexcel Practice Management Standard Birmingham Law Firm of the Year for 2011 Resolution Collaborative Family Lawyer The Law Society Accredited in Family Law UK Legal 500 2016 Conveyancing Quality Scheme