Clare Lang heads up mfg’s Corporate Division which deals with M&A and other corporate matters; and is also part of the firm’s Restructuring and Insolvency Team, which has been set up across the firm’s teams.
In this note, Clare examines a certain form of restructuring process you’ll probably have seen a lot about in the press of late – the prepack.
- What exactly is a prepack?
- How does it work?
- What are the benefits - and disadvantages?
So you’ll have seen in the news there have been quite a few high profile corporate restructures of late, particularly in the retail sector, known as prepacks. Recent ones in the press are:
- The acquisition of McColls by Morrisons in a £190m prepack deal;
- The pre-pack acquisition of Transform Hospital Group, saving over 300 jobs.
- The buyout of Brymor Construction Limited in a pre-pack deal, saving around 110 jobs.
So what exactly is a “prepack” and how can a new owner buy the business of a company, seemingly leaving its debts behind?
Administration is often seen as a process used when a business is on the brink of collapse. But this isn’t always the case - in fact, administration can be a flexible rescue tool which, if the circumstances are right, can be used to ensure the survival of your business.
Under a “prepack”, an insolvent company is put into administration, and its business and some or all of its assets are immediately sold to a new buyer company, under a deal arranged before the administrator was appointed. Having bought the business and assets of the old company, the new buyer company starts trading in its place.
So a prepack could be the answer if your company can’t pay its debts, but you still believe in the business – for example those retailers we talked about who, whilst their physical stores were untenable, still had a sustainable online business. And instead of putting more cash into the struggling business, under a prepack you can use your available cash to fund the new company.
What are the benefits of a prepack?
Compared with sales negotiated at arm’s-length after entry into administration, prepacks are generally quick and smooth, trading transferring from the old insolvent company to the new one seamlessly.
- You can reduce price erosion caused by loss of goodwill through a protracted insolvency and marketing process;
- It often reduces the costs of the administration as the administrator does not need to find funds to trade the business; and
- Generally, there is a better return for creditors.
If you do a prepack, what debts will and won’t transfer to the buyer company?
Unless specifically assumed by the buyer company, trade debts will be left behind in the old company. (Practically however, you may need to settle certain liabilities with key suppliers who are crucial to the business going forward.)
Tax liabilities and liabilities to secured creditors and other funders will also remain in the old company.
In relation to employees…
Whilst the normal TUPE rules will apply and employees will automatically transfer to the buyer company and receive unfair dismissal protection, special rules apply in relation to certain employee debts.
For employees that transfer to the buyer company:
- wage arrears and pay for holidays taken WILL NOT pass to the buyer company, but will instead be paid by the Redundancy Payments Office (RPO) out of the National Insurance Fund - up to certain limits.
- However the RPO WON’T cover:
- statutory redundancy payments;
- pay in lieu of accrued but untaken holiday entitlements; or
- notice pay,
as those employees won’t have been dismissed.
Where employees are dismissed and the reason for dismissal is the transfer:
- the RPO will cover such employees’ wage arrears and holiday pay - again, up to certain limits.
- the RPO would not cover statutory redundancy payments and notice pay - as the employees would not have been made redundant.
In addition, there may be claims against both the old company and the buyer company for unfair dismissal.
Another benefit is the ability to make “permitted variations” to employees’ terms and conditions following a sale out of administration.
So whilst, on a solvent deal, it is illegal to change employees T&Cs under TUPE, on a prepack deal (or any other sale out of administration in fact) it is possible to agree certain changes to transferring employees’ terms of employment.
Those changes must be made with the intention of safeguarding employment by ensuring the survival of the business – these are known as “permitted variations”.
For example, it would be possible to agree lower salaries or reductions in benefits following a sale of a business out of administration, provided such changes were agreed with employee representatives.
Notwithstanding any permitted variations, the employees will still have continuity of employment.
What are the criticisms of prepacks?
Pre-pack administration sales are often criticised:
- because unsecured creditors don’t know about the deal before it happens, so there is no chance for the to protect their interests by voting on the proposal.
- for lack of accountability, as the administrator sells assets before his proposals have been agreed by the creditors and without court approval.
Questions are sometimes raised on prepacks’ ability to maximise returns for creditors – as the administrator selling the business and assets and won’t necessarily have tested their market value by advertising to interested buyers.
There is also the stigma of “phoenixing”. Creditors are suspicious about prepacks as the business is being sold back to the original owner-managers, seemingly allowing them to “asset-strip” the company or dump its liabilities.
But to sum up…
Despite the criticisms, prepacks are a useful rescue tool where an insolvent business still has value but needs to be restructured to be sustainable.
Prepacks can minimise the loss of confidence of suppliers, customers and employees; often saving jobs on the basis that there will be a continuance of trading without a break; and meaning a better return for creditors.
If you’ve got any questions about this or other factors affecting your business, please get in touch.