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Variations on a theme: Pre-Pack Sales

Company insolvency work frequently has the objective of rescuing a business as a going concern, maximising the return to creditors. This is a theme often explored in the press and with clients anxious to save an otherwise sound business.

This article explores the costs of the three choices that are often available where the intention is to prevent a business falling apart. This might happen in cases where contracts may terminate on formal insolvency proceedings, meaning that customer or supplier relationships that are valuable to the business fall away rapidly, taking the goodwill of the business with them. Pre-pack administrations are a process that can protect the business from this type of outcome but other approaches are also popular, particularly where the business is relatively smaller and where it would therefore not be cost effective to place the company into administration.   

A Corporate Voluntary Arrangement (“CVA”) requires the company to put a proposal to creditors. At least 75% of the creditors (by value) must accept in a meeting summoned for the purpose. 51% of members (shareholders) must also agree.

The proposal might include any or all of: (i) introducing cash into the company to enable it to pay a dividend to creditors, (ii) generating funds from a sale of assets, or (iii) making a payment to creditors out of future profits over a defined and agreeing that period.

There will be a cost for assisting the directors in preparing the proposal, during which time the insolvency practitioner acts as Nominee. There is then a cost for supervising the agreed proposal, when the practitioner acts as supervisor.

A pre-pack sale in an administration usually involves the sale of the business to a NEWCO and could be costly. The costs include:

  • Obtaining a professional valuation for the business and market the business to ensure market value is paid for it
  • Obtaining an opinion from the Pre-Pack Pool see https://www.prepackpool.co.uk/home
  • Drawing up a legal agreement for the sale of the business
  • Making application to the court for an administration order
  • Dealing with the Administrator’s fees for the sale
  • Paying the Administrator to deal with the administration.

Clients may wish to find a cheaper route through the liquidation process. Costs usually incurred in a liquidation include (i) those for placing the company into voluntary liquidation (including the advertising and bonding costs) and (ii) the costs for acting as liquidator. If it is decided to sell the business to a NEWCO before liquidation and assistance is needed in dealing with the formalities, such as obtaining a formal valuation etc., then costs similar to that for a pre pack Administration are likely to be incurred.

All in all, the CVA route may be the least expensive and it also means that the directors continue to control the company, even after the CVA has been approved.

Please note that the above is provided for illustration purposes only and comprises a short view of extremely complex insolvency and other legislation. This is a complicated area and specific advice must be sought before undertaking any course of action or before refraining from any course of action. Gore and Company takes no responsibility for any loss incurred to or by any person who either acts or refrains from acting on the basis of the above or of any other item published on this website. The above note may not be reproduced without the prior written consent of Gore and Company.

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