Pre-Pack Sale: How the Price Is Tested

A business loses value from the day its insolvency becomes public. Customers stop ordering, suppliers ask for cash before delivery, staff leave and landlords look at their remedies. For a business whose value lies in people, contracts and a brand rather than in land or machines, a few weeks of trading in an open insolvency can destroy much of what a buyer would have paid for. A pre-pack finds the buyer while the business still trades normally, then lets the administrator complete the sale at once.

The secured lender is usually central. It often funds the business through the weeks of preparation, it must release its security over the assets sold, and as first-ranking creditor it receives most of the price. Lenders therefore often support pre-packs, and unsecured creditors, who typically receive little, are the ones most likely to question them.

The working parts recur: an insolvency practitioner engaged before the appointment, a marketing exercise (often short), an independent valuation, the lender's consent, the appointment and an immediate sale. What differs is the regulation around them.

The UK has the most developed regime. A professional standard, SIP 16, requires administrators to explain a pre-pack to creditors: the marketing undertaken, the valuation relied on, the alternatives considered and any connection between buyer and company. Since 2021 (30 April in Great Britain, June in Northern Ireland), regulations have added a hard rule for buyers connected to the company, such as its directors or their associates. A substantial disposal to a connected person within eight weeks of the company entering administration needs either the creditors' approval of the administrator's proposals or a qualifying report from an independent evaluator. If the evaluator finds the case not made, the administrator may still proceed, but must send the report and a statement of reasons to creditors and to the registrar of companies.

New Zealand and Australia have no statutory pre-pack procedure. Sales of the same shape are agreed before a receiver or voluntary administrator is appointed, and the practitioner's duties on price apply: in New Zealand a receiver's duty to obtain the best price reasonably obtainable as at the time of sale, in Australia a controller's duty to take all reasonable care to sell for not less than market value. Since February 2020 Australia has also let a liquidator (through the court) or ASIC undo a disposal of company property for less than both its market value and the best price reasonably obtainable, where it kept the property from creditors and the company was or became insolvent, or entered external administration within a year. A sale by an administrator or under a deed of company arrangement is excepted, so the rule bites on transfers made outside those processes, such as one the company makes itself before an appointment. In New Zealand, phoenix company provisions restrict the directors of a company in insolvent liquidation from running a new company with the same or a similar name, subject to exceptions and the court's leave.

A footwear retailer in England with 23 stores, constructed for this page like every figure in it, owes its bank US$9.0m under a debenture. Before their appointment, the proposed administrators market the business for three weeks to 40 parties. The directors' new company offers US$5.5m for the brand, the stock and 17 of the leases. The only other offer, from a competitor, is US$4.2m for nine stores, with the rest to be closed and their stock sold off over three months of trading in administration. Figures are in US$m and belong to the example.

The pre-pack returns US$1m more to the bank and keeps more stores and jobs. It also sells the business to the people who ran it before the administration, inside eight weeks, so the administrators obtain an evaluator's report on whether the price and grounds are reasonable, and send creditors a SIP 16 statement on the marketing and the valuation. The ring-fenced amounts are the example's approximation of the prescribed part.

Then the second request arrives: the directors' company asks the same bank to finance the purchase. That is a new credit decision about the same management with a clean balance sheet, and it needs its own answer, separate from the recovery the pre-pack delivers.

The two are run together because both can end with the old owners trading the old business through a new company. The difference is price and process. A pre-pack is a sale by an insolvency practitioner who owes duties on price and must account for the marketing and valuation behind it. Illegal phoenix activity moves a business's assets to a new company for less than they are worth to leave the debts behind, usually with no independent seller and no evidence of value. A pre-pack done badly can look like one, which is why the connected-party rules exist.

It also differs from a credit bid, which is a way of paying rather than a way of timing a sale, and from a trading sale in voluntary administration, where the business is marketed openly after the appointment.

DEFINED IN ONE PARAGRAPH → · WHEN A LOAN GOES BAD → · THE CREDIT BID →

For the lender, the decisions come in a sequence. Will it fund the weeks of preparation, knowing the money is spent before any sale is certain? Will it release its security against the price offered, or hold out for an open process? Is the marketing wide enough and the valuation independent enough that the sale will withstand a challenge later? And if the buyer asks for finance, does the bank want to lend to it?

Guarantees survive the sale. If the directors guaranteed the old company's debt, the bank's claim for its shortfall runs against them even while they own the new business, and any release negotiated as part of the deal is itself part of the price creditors will look at.

PERSONAL GUARANTEES → · SHORTFALL DEBT →