To some, the phrase ‘pre-pack administration’ can evoke a sense of loss and injustice, evidenced by criticism in the press, particularly where the sale is to the current owners or management. To others, it can provide an opportunity to rescue a business and save jobs.

But what is a pre-pack? In essence, it is a sale:

  • of a company’s business/assets immediately upon the company’s insolvency (normally an administration);

  • transacted between a purchaser and the company (acting by its administrators);

  • excluding liabilities;

  • whereby employees transfer to the purchaser.  

Value is normally enhanced by selling a business as opposed to realising assets piecemeal

For such companies sponsoring defined benefit pension schemes, the scheme will (assuming it is a single-employer scheme or the company is the last employer in a ‘last man standing’ scheme) pass into the hands of the Pension Protection Fund for assessment.

Where those schemes are funded below PPF levels, the position of scheme members is protected through legislation. Many members will not receive their full benefits; however, they will receive some –  which may contrast with various other stakeholders, particularly unsecured creditors, who may receive little or no return at all.

The PPF effectively steps into the scheme’s shoes and is often the largest unsecured creditor in the insolvency.

Trustees often have a seat at the table

While a company’s demise can move swiftly, there are cases where scheme trustees and sponsors have an ongoing and transparent dialogue; in these cases, the trustees (and the Pensions Regulator and PPF) will, like certain other stakeholders, already have a seat at the table.

Indeed, a pre-pack might result from other rescue options being vetoed. This is not always the case though, and the government is expected to put forward legislative reforms in 2019 that will strengthen the obligations on management teams to bring their pension trustees onside for major transactions.

It is important to highlight that a pre-pack does not just happen overnight – while to the outside world it may appear to be the case, in reality it is normally the culmination of a process over a number of weeks in which directors and their advisers seek the most beneficial option and outcome for the business.

To be clear: a company can become insolvent for many reasons, but where directors become aware their company is insolvent, they have a duty to act in creditors’ interests. Not to do so can open them up to action being taken against them personally if the position of creditors worsens.

Pre-packs can preserve value

Directors will be led by advice from restructuring professionals as to the options available – and value is normally enhanced by selling a business as opposed to realising assets piecemeal.

Selling a business in a seamless manner as opposed to it being traded in administration can maximise asset values, continuity of customer/supplier relationships and staff retention; goodwill in various guises can erode very quickly following insolvency.

Pre-packs are also subject to regulatory scrutiny; insolvency practitioners acting as administrators are required to comply with Statement of Insolvency Practice 16. This sets out various issues they must have covered, including ensuring appropriate marketing of the business and stakeholder interaction.

Administrators closely scrutinised

Furthermore, administrators must inform all creditors (with a copy to their regulatory body) of the background to the transaction and how they formed the view that it was in the best interests of creditors.

This should set out in detail how the process has evolved – in many cases taking the form of a confidential accelerated mergers and acquisitions process while ensuring stakeholders (notably directors, shareholders, lenders and pension scheme trustees/PPF) are updated throughout the process.

From a pension scheme’s perspective, the PPF has issued guidance as to how it expects restructuring professionals to engage with it.

Assuming due process is followed, while the demise of a company/scheme sponsor is always regrettable, a ‘pre-pack’, to the extent that it is the rescue tool of choice in the specific circumstances, should be readily justifiable in terms of outcome and of the available options. Where due process is not followed, administrators can expect to be challenged.

Guy Mander is a restructuring advisory partner and head of covenant assessment services at RSM

Topics