Why a Pre-Pack May Be Suitable

The term pre-pack refers to a restructuring method where the business of an insolvent company is sold before it enters administration, typically to an existing third-party buyer. It is common practice in a number of jurisdictions and is typically implemented through the formal insolvency process.

There are many reasons a pre-pack may be suitable including:

The main disadvantage of the process is the potential for significant loss to creditors. However, a pre-pack sale can help to preserve value by completing the sale before the insolvency announcement is made (and therefore minimising the risk of value diminution), and also allows for continuity of trading through largely uninterrupted customer service and continuation of supplier contracts. This helps to maintain commercial momentum and can often result in employees saving their jobs, as the Transfer of Undertakings – Protection of Employment Regulations will transfer employee contracts to the newco.

Exploring Pre-Pack Insolvency: Pros and Cons

As the process is private, unsecured creditors will typically have little or no knowledge that a pre-pack is being considered and implemented until after it has been completed. This can lead to concerns about transparency and fairness, particularly where the sale is to a connected party purchaser, and the Government has recently introduced new regulations to improve marketing processes and asset valuations for pre-pack sales in order to mitigate these concerns.

These new rules require that all pre-packs are referred to the ‘Pre-Pack Pool‘ before they can be completed, enabling independent experts to provide an opinion on whether the deal is likely to be viable. This is intended to provide further reassurance to creditors that the pre-pack will have a positive outcome for them.

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