Since the management process became the key business rescue process more than two decades ago, prepackage management has suffered from a tarnished reputation.
Recently introduced legislation has imposed stricter controls on the process, particularly when the sale of the prepackage is made to a related party.
So Paul Reeves, Managing Director of Restructuring Advisory, Kroll asks if the previous package is destined for the rescue dump or will it prove to have a key role in the restructuring of many UK companies as we emerge from the pandemic?
What is a prepackaged administration?
Unlike a commercial administration, a prepackage is a process by which the sale of the assets of an insolvent company is agreed before the beginning of the administration. With the appointment of an administrator, the previously agreed deal is completed. The sale is often arranged without the business being announced. This is in order to protect the goodwill of the company, minimize administrative expenses, and preserve key relationships with customers and employees, which could otherwise be damaged. In order to minimize potential disruptions, prepackage is typically for a buyer who is tied to or involved with the insolvent business and who has a vested interest in its survival. These related parties are often in the best position to move the business forward and represent the best option to obtain maximum value for the entity’s assets. As a consequence, it is often the most lucrative outcome for creditors.
The new legislation
The recently introduced legislation has changed the process of selling a company, through a pre-package, to connected parties. Certain conditions must now be met before a manager can dispose of company assets to a related party during the first eight weeks after a company enters management. So what are these conditions that must be met? Administrators are faced with two options. They seek prior approval from creditors who may sanction the proposed prepackage agreement or request a report from an independent evaluator who must conclude that the proposed agreement is in the best interest of creditors.
Seeking creditor approval before concluding a pre-package sale of a company’s assets appears to have positive merits. Provides full transparency and prevents finger pointing further down the line. However, seeking approval from creditors could slow down the process to the point where the benefits of a quick transaction are lost. Furthermore, managers could be in a difficult position if approval is not obtained, potentially leaving them to negotiate a business with all the resulting risks that could arise.
Involve an independent evaluator
In practice, this is likely to be the route to be followed in most prepack scenarios. Before a related party transaction takes place, an administrator will contact a person who has the relevant experience and knowledge, along with appropriate professional indemnity coverage. This appraiser is tasked with evaluating the proposed transaction and should ultimately be satisfied that the consideration offered for the business assets and the reasons for the disposal are reasonable under the circumstances.
Although the administrator is not bound by the final opinion of the evaluator, the administrator must provide a report to creditors and the business registrar in which he sets out his reasons for proceeding with the sale. It will be a courageous steward to proceed with a pre-package transaction when it conflicts with the reviewer’s opinion, even if the opinion is not binding.
It cannot be binding as the servicer has its own duties and obligations, which includes acting in the best interest of the creditors as a whole.
Prepackage administrations moving forward
It is easy to understand why there is new legislation that seeks to provide greater transparency in prepackage offerings. Creditors have often felt that they have been forced into a situation where a business sale has occurred without their involvement. While the new legislation does not necessarily provide creditors with as much information as they may want, it should at least give them peace of mind that transactions have been scrutinized, at some level, prior to completion.
The past 18 months have been a challenging time for many companies as they have battled the dire business impacts of COVID-19. There is a crucial role for prepack administrations in helping the UK recover from the dramatic impact of the pandemic, and it would be a shame if these new legislative changes prove to be a hindrance to the process.
Hopefully that won’t be the case, but the jury is out.