Lecture 4: Pre-packaged sales (Pre-packs)

Question 1

What is a pre-pack?

Answer 1

Statement of Insolvency Practice (SIP) 16 - a pre-pack is and arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment.

Question 2

What are the attributes of a pre-pack?

Answer 2

• Do all the hard work before administration.
• Should be able to wrap up administration quite quickly after administration has begun.
• Out of court procedure

Question 3

What are statements of insolvency practice? (SIPs)

Answer 3

best practice standards that IPs have to comply with, they are not legal documents but IPs that do not comply can be found guilty under disciplinary procedures from qualifying bodies.

Question 4

Are pre-packs a new phenomenon?

Answer 4

There has been a lot of recent hype and criticism over the rise and use of pre-packs the practice of pre-packing has been around since the 1980s.

Question 5

Examples of pre-packs in the UK and the US.

Answer 5

In the US, General Motors was sold as a pre-pack for $50bn. 225,000 staff were re-employed. (biggest pre-pack to date)
Lehman Brothers - dealt with and transferred on within 40 days of administration (Chp 11)

• In the UK,the Officers Club was sold as a pre-pack by PwC (120 retail stores; over 1,000 staff). Whittard of Chelsea was sold as a pre-pack by EY (130 retail stores; over 1,000 staff)

Question 6

What are the findings of Finch’s (2007) comparison of pre-packs and business sales between sept 2001 and sept 2004?

Answer 6

Sample:
412 business sales
227 pre-packs

Of 227 pre-packs, 118 are administrations.

66% post enterprise act 2002.

	○ So higher incidence of administration pre packs since the reforms 
	○ Possibly linked to new out of court procedure

Question 7

What are the benefits of a pre-pack?

Answer 7

• Avoids disruption
• Formal insolvency is destructive, so try to minimise the harmful effects.
• The process is faster.
• Looks like the company hasn’t failed. Outside the glare of formal insolvency.
• Going concern sale of the business.
• Hopefully preserve the supply chain.
• May be good for companies that depend upon human capital or brand name or goodwill.
• Consistent with rescue culture.
• Some research suggests higher returns to creditors (Frisby 2007-2010).
• Lower professional costs.
• Useful when there may be a “hold out” problem.

Question 8

What is the aim of a pre-pack?

Answer 8

To ensure a seamless transition to rescue.

Question 9

What objective of insolvency does a pre-pack aim to achieve and why is it difficult?

Answer 9

Objective 2 - continue to trade.
Funding for trading in insolvency can often be difficult.
Why would banks fund if they can’t see an upside?

Question 10

What are the downsides to pre-packs?

Answer 10

• Hard to get funding to continue trading.
• Inherent risk of trading the business.
• Higher incidence of retention of title stocks and consignment stocks which creditors can seize.

Question 11

What are consignment stocks?

Answer 11

have stock on hand physically but only get invoiced when you use it, so legally it is still owned by the supplier.

Question 12

What are retention of title stocks?

Answer 12

ownership stays with the creditor until the company has paid in full for those items

Question 13

Why are pre-packs consistent with rescue culture?

Answer 13

Pre-packing provides a speedy route to recovery.
Better for employees (in 92% of pre-pack sales, all employees were transferred to the new company compared with 65% in a business sale arranged during insolvency).

Question 14

What is the difference between pre-packs in the UK and the US?

Answer 14

In the US you need court approval for the pre-pack.
Plus can have pre-voted and post-voted pre-packs.
Pre-voted - voted on prior to entry into Chp 11.

Question 15

What were the findings of Tashjian et al, 1996 in their study of US pre-packs?

Answer 15

Their study measured the efficiency of pre-packs in terms of:
• Length of time required to reorganise
• Direct fees
• Recovery rates

Time spent in reorganisation in the US:

• Debtors spent an average of 18.3 months negotiating with creditors prior to filing in the case of prepacks
• this compares with 8.1 months in the case of traditional Ch 11
• Debtors spend an average of 3.3 months in chp 11
• 20.4-30 months in the case of traditional Ch 11
• An element of substitution of time between out of court negotiations and time spent in chp 11.
• Pre-packs had a shorter period in total.

Fees:
Direct Fees (pre-pack) 
- On average 1.85%
- 2.8% in the case of traditional ch 11
- 0.65% in the case of out-of-court/private restructurings.

Recovery rates:

• 72.9% for all pre-packs across entire firm
• Again prepacks lie between traditional ch 11 (50.9%) and out-of-court restructurings (80.1%)

Question 16

Why is a pre-pack a hybrid form of insolvency?

Answer 16

Hybrid form because pre-pack is between out of court and formal insolvency in relation to time spent.

Question 17

What are the problems with pre-packs? (reasons for criticism?)

Answer 17

• Perception of pre-packs
• Sale is quite often to a connected person - idea of collusion.
• Sale has not been exposed to market forces
• Lack of transparency - unsecured creditors are not consulted until after the deal has been completed
• Disenfranchisement of secured creditors - can be seen as similar to receivership, may be little incentive for administrator to negotiate more than the required to cover secured debt - limited data on this to reach an overall conclusion.
• Inconsistent with the first objective of administration.