Pre-Pack Pool in the Press

The Johnston Press pre-pack has recently put the Pre-Pack Pool in the public spotlight. While this case wasn’t actually eligible for referral to the Pool, it has led to questions about how the Pool and Pre-Packs work.
 
Pre-Packs and the Pool
 
Pre-packs are a relatively common and useful form of business rescue, accounting for just over a quarter of all administrations in 2017. A pre-pack takes place when the sale of all or part of an insolvent company’s business or assets is agreed before the company enters administration, with the sale completing shortly afterwards. Creditors will find out about the sale after it has happened. Insolvency regulations require that a pre-pack only happens when it is the best possible option for a company’s creditors.
 
A pre-pack may involve a sale to someone previously connected to a business, such as the business’s former owner or director. This is known as a ‘connected party’ sale. The Pre-Pack Pool is only involved in connected party sales (which is why a referral was not made in the Johnston Press case: the secured lenders, rather than a ‘connected party’ bought the business and so the pre-pack did not qualify for the Pool).
 
What are the advantages and disadvantages of pre-packs?
 
The advantage of a pre-pack is that it protects the value of a business – and therefore protects the value of what can be repaid to creditors. Maintaining a struggling business’s value can be difficult, as any publicity can cause contracts to be cancelled or the ‘goodwill’ value of a business to fall before a sale can take place.
 
However, the lack of up-front transparency can cause concern for creditors. While an insolvency practitioner will oversee the pre-pack and must ensure that it is the best option for creditors in the circumstances, it’s understandable that creditors want as much assurance as possible that a pre-pack was the right option.
 
This is the main purpose of the Pre-pack Pool: to provide additional assurance for creditors, on top of the assurance provided by insolvency practitioners, that the case for a pre-pack has been made in situations where there is a connected party sale. Understandably, this is the type of situation where creditors would want as much reassurance as possible.
 
How does the Pool work?
 
Connected party purchasers have the option of submitting proposed pre-packs to the Pool for review by an independent business expert. This expert will then offer one of three opinions on behalf of the Pool:
 
  • Nothing found to suggest that the grounds for the proposed pre-pack sale are unreasonable;
  • Evidence provided has been limited in some areas, but otherwise nothing has been found to suggest that the grounds for the proposed pre-pack sale are unreasonable;
  • There is a lack of evidence to support a statement that the grounds for the proposed pre-pack sale are reasonable
 
The Pool’s opinion will be included in an insolvency practitioner’s report to creditors once the pre-pack is complete. While a ‘negative’ opinion from the Pool won’t stop a pre-pack, it will help creditors question what happened, and it might help a creditor think about how they engage with a business which has been through a pre-pack. If a Pool opinion hasn’t been sought, creditors might want to ask why. Because the Pool is not compulsory, this sort of pressure can help encourage connected party purchasers to use the Pool, and to help increase pre-pack transparency.
 
 
What happens next with pre-packs?
 
The Government is currently deciding whether or not to exercise a power It has to regulate or ban ‘connected party’ sales in any administration, including pre-packs. This power expires in 2020. The Government’s decision-making process will involve a review of the impact of the Pre-pack Pool and other changes made to pre-packs back in 2015. We’re looking forward to the outcome of the Government’s review.