Friday, 28 November 2008

With the rise of company failures will pre-packs become the norm?

A pre-pack is a sale of a company's business and assets (often to existing management) that is negotiated prior to the formal appointment of an administrator with the intention that completion of the sale take place immediately following such appointment. Recent examples of pre-packs include Faith Shoes.

Creditors often feel hard done by in pre-packs as they feel they have been kept in the dark with the sale having taken place before they have even learnt of the company's insolvency or had the chance to exercise their contractual rights and that a better price could have been achieved by putting the business out to tender. Others would argue that pre-packs are a legitimate tool to preserve value in a company's business for the benefit of stakeholders generally leading to the preservation of jobs and a greater realisation of value than might otherwise be achieved. They point to the fact that they enable a company that would otherwise not have sufficient funds to be traded by an insolvency practitioner in administration, to effect a sale that would not otherwise be achieved and to the fact that it prevents the company's customers, third party suppliers, landlords and intellectual property licensors exercising any automatic termination rights on the commencement of an insolvency process, realising the value of assets that might otherwise be lost.

Fashionista thinks that there are circumstances where pre-packs may be appropriate but it is clearly not a one-size-fits-all approach. Finally, a word of warning if you are thinking of doing a pre-pack and you have leasehold properties, watch out for the landlords. They often don't take kindly to finding that they have a proposed new tenant for their shop or business premises with little or no notice. The potential purchaser would be wise to sound out a landlord immediately before the sale to avoid the risk that he withholds his consent to any assignment thereafter.