The number of pre-pack Administrations has increased dramatically since new regulations came into force in 2021 aimed at bringing more scrutiny and transparency to the asset sales they facilitate.
Since the introduction of the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, the number of pre-packs has risen 171% from 201 in 2021 to 545 in 2023, according to the Insolvency Service. The data, which is based on recorded SIP16 statements, also shows the number of connected party sales has more than tripled over the same period, from 106 in 2021 to 329 in 2023.
In these sales, a purchaser will buy all, or substantially all, of the business and assets of the insolvent company from the Administrators. The terms of the deal will be agreed before the Administrators are appointed and completion usually happens immediately after they take office.
The acquisition of a distressed business is obviously an attractive proposition from the point of view of value, but these deals come with an unusual set of risks and abnormalities. Purchasers should never expect the reassurances of a solvent acquisition, such as the opportunity for thorough due diligence, and certainly not comprehensive representations and warranties from the Administrators.
What are the key issues faced by a purchaser negotiating a pre-pack acquisition?
Confirming what the sale covers and documenting it in the agreement
The essence of a pre-pack is the sale of the key assets of the company to new owners, enabling the business to continue as a going concern, whilst leaving the debts and liabilities behind in the original insolvent corporate entity. Ensuring that the assets to be included in the sale are correctly identified is crucial. It is every bit as important to specify what is excluded.
Forget about doing comprehensive due diligence
The purchaser will receive no representations or warranties from the Administrators as to the assets purchased, which are sold by them after their appointment on an “as is” and “where is” basis. It’s worth remembering that the prospective Administrators themselves will often have only limited information on the business to be sold and its assets.
The ability of the purchaser to carry out any due diligence at all is likely to depend on the cooperation and responsiveness of the insolvent company’s management, but even so due to the short period in which to negotiate and complete such a transaction, it will be limited.
Preserving existing key customer or supplier contracts may be difficult
These contracts do not transfer automatically to the purchaser, so the assignment or novation of each one individually will have to be negotiated. Bear in mind that a contractual counterparty is not obliged and may not be willing to trade with the new owner of the business. Even if it is, it may take advantage of the situation to renegotiate prices and terms of the contract, and it may try to use any operational leverage it has to recoup losses caused by the original company’s insolvency.
Re-instating operational licences
The purchaser will need to ensure that any licences required are in place to enable the business to keep trading. Licences such as for the sale or alcohol or provision of regulated entertainment will have automatically lapsed when the Administrators are appointed. Coordinating the transfer or reinstatement of any such licences with the sale is essential.
Retaining the right to occupy the premises
Purchasers usually take over premises under a licence to occupy instead of a lease assignment. Getting landlord consent to and completing a formal assignment is rarely possible within the accelerated timetable of a pre-pack sale. A licence to occupy the property for a specified time gives the purchaser time to negotiate with the landlord, although there is no certainty their consent to an assignment will be forthcoming.
Employee liabilities will go with the assets
In most circumstances, all employees of the business and the liabilities attached to them will automatically transfer to the purchaser as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The sale and purchase agreement cannot provide otherwise. This means that the purchaser takes over all the seller’s rights, obligations and liabilities flowing from the transferring employment contracts. The potential liability relating to transferring employees will be a key concern for the purchaser, and is often reflected in the purchase price.
The Administrators will demand indemnities from the purchaser
The Administrators will not take on any risk, which means that they will require the purchaser to indemnify them against any liabilities arising in relation to the sale transaction or to the assets themselves. Among other things, indemnities covering any employment liabilities relating to the transfer of business will be non-negotiable.
The Evaluator’s report
Where the proposed transaction is with a connected party such as the existing management or owners, an ‘evaluator’s report’ will be required under the Administration (Restrictions on Disposal etc to Connected Person) Regulations 2021 (the “Regulations”) apply, requiring the purchaser to obtain a report of an independent evaluator on whether the terms of the sale are reasonable. This increases the cost of a pre-pack purchase.
Having the right advisers is essential
Instructing legal and other professional advisers who understand the pre-pack sale and purchase process and its risks and are experienced in conducting negotiations within the tight deadlines fundamental to such sales is essential.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.