Out-Law / Your Daily Need-To-Know

Pre-packaged insolvency sales

Out-Law Guide | 30 Aug 2011 | 4:21 pm | 5 min. read

This guide was last updated in May 2017.

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:

  • the hand-over of the business is intended to be seamless, both internally and in relation to third parties;
  • the parties will be able to exercise greater control over the message being put across to suppliers, customers and others outside the company;
  • the corresponding lower degree of uncertainty and adverse publicity will minimise the risk of deterioration in the company's customer and supplier bases, and will provide a basis for maintaining good workplace relations with employees;
  • the speedy sale also reduces the opportunities for third parties, such as landlords or suppliers, to disrupt the continuation of the business;
  • the parties will be able to exercise greater control over the sale process, and the business is more likely to be preserved intact as a going concern;
  • the minimal disruption of supplies to customers and the lower profile of the insolvency often enhances debt collection;
  • with the buyer's finance for the sale in place in advance, the risk of the sale falling through after the IP is appointed is minimal;
  • a quick sale will effectively stop the directors from trading or continuing to trade the company while insolvent and will therefore minimise their risks of personal liability for breaching their duties to the creditors;
  • without the appointed IP having to trade the company while searching for a buyer, the overall costs of the insolvency process are generally lower and can be easier to anticipate - resulting in a better return for creditors;
  • a sale to a buyer who is connected to the insolvent company will be less vulnerable to being successfully challenged later if it is carried out through a pre-packaged sale by an IP who has independent duties to creditors and no prior connection with the insolvent company.

Disadvantages of pre-packaged sales

Disadvantages of the pre-packaged sale process are as follows:

  • as the seller will be unable to provide warranties or indemnities, the buyer will be almost totally reliant on its own due diligence and investigations. A buyer in a pre-packaged sale may have even fewer opportunities to carry out suitable enquiries than might normally be the case;
  • there is a risk to both parties that certain assets may be missed or not valued properly. This could lead to the sale being challenged by a future liquidator at a later date, and potentially reversed by a court;
  • there is a risk that a quick sale to connected parties may be criticised or challenged - whether by a liquidator, creditors or other potential purchasers - if the IP is unable to demonstrate that he obtained the best price available in the circumstances. To avoid such a challenge, the IP will need to be able to provide evidence of recent and consistent attempts to sell the business together with evidence of its value and the risk to that value posed by marketing the business in a more open way. Referral to the Pre-Pack Pool will also reduce the cost of criticism or challenge;
  • even in the absence of an actual challenge, the sale may be perceived as having been done in an underhand manner unless steps are taken to demonstrate that it was not. This could potentially damage the reputation of the business;
  • the buyer needs to have its method of acquisition and finance in place or available to it before the IP can be appointed;
  • a pre-packaged sale will not prevent 'insolvency event' clauses from being triggered. These can terminate the insolvent company's key contracts. However, the seamless nature intended by a pre-packaged sale should avoid panic terminations and allow the buyer the opportunity to preserve the insolvent company's relationships.