Out-Law Guide 5 min. read
30 Aug 2011, 4:21 pm
When a company enters into a formal insolvency process, the executive powers of its board are suspended and an insolvency practitioner (IP) becomes responsible for administering its affairs. If possible, an IP will want to sell the business and assets of the insolvent company so that the claims of creditors can be paid.
A pre-packaged insolvency sale is a sale which is structured, negotiated and agreed on by an 'IP in waiting' and a buyer before the proposed insolvency procedure begins and the IP is formally appointed. This means that the buyer must have its own structures and funding in place before the deal is completed. Once terms are agreed, the IP is appointed and the sale will normally be completed soon after - usually within minutes.
The formal insolvency process used in the case of a sale will invariably be administration or administrative receivership. For more information about the types of insolvency procedure available to companies and their creditors, please see our separate OUT-LAW Guide.
Why have pre-packaged insolvency sales evolved?
Public notice must be given of a formal insolvency procedure. Although going through the formal process may be essential to protect the insolvent company's business, in certain cases that business would be unable to sustain a lengthy or high-profile association with such a procedure without it causing serious damage to the underlying value of the business. The pre-packaged sale process developed in response to this risk, to preserve the value of the insolvent company for its creditors. It now accounts for a significant proportion of the business sales that are made by IPs.
This issue of value is central to the pre-packaged sale process. The IP must be comfortable that the price achieved - and therefore the outcome for creditors - is demonstrably higher than that which could realistically be achieved under any other scenario. This is not always easy to achieve in a situation where the IP is, by definition, unable to test the market to establish the true level of interest in the company were it not insolvent. A 'special purchaser' may exist who may be prepared to pay an inflated price for the business, perhaps because it offers strategic advantages unique to that buyer, but may be less willing to do so in an insolvency situation. The IP will often have to investigate the existence of price comparators and industry or sector-specific factors, as well as matters which are sufficient to the company itself.
If the IP conducts a sale having failed to achieve a strong enough price, there is a risk that the deal may be challenged by a subsequently appointed liquidator of the company. This may result in personal liability for the IP, but it is also important to the prospective buyer as the sale itself could be reversed if successfully challenged.
Advantages of pre-packaged sales
In recent years, pre-packaged sales have attracted some criticism for their lack of transparency as the sale is completed before creditors are aware of the company's financial difficulties. In particular, questions have been raised in relation to sales to a buyer connected to the insolvent company. To address such concerns the Pre-Pack Pool was established in November 2015. In the case of a sale to a connecter buyer, the buyer can ask the Pre-Pack Pool, an independent organisation to review the sale and confirm that is represents the best deal. However, as the Pool is a voluntary process, it is not yet widely used.
Some of the advantages of the pre-packaged sale process are as follows:
Disadvantages of pre-packaged sales
Disadvantages of the pre-packaged sale process are as follows: