A ‘pre pack‘ is an arrangement in which an insolvent company and its assets are sold to a new purchaser on the basis of a deal that was negotiated before the administrator’s appointment. The ‘pre pack’ process can be used in a variety of circumstances, including when the insolvent company has onerous contracts, a large number of employees or a high debt-to-asset ratio. The purchase by the new purchaser will typically involve the novation to the new buyer of the insolvent company’s debt claims by the existing secured creditors.
Unlocking the Potential: The Basics of Pre-Pack
Although the pre-pack procedure was designed to make corporate rescue possible, it has also been criticised for enabling management or investors to freely transfer the value of a distressed company without taking on its tax liabilities, pension deficits and supplier debts. In response to concerns about how pre-pack sales were being conducted, and to increase market confidence, the United Kingdom introduced new regulations in April 2021 that require administrators to obtain a Qualifying Evaluator’s Report for any sale to a connected party.
The chapters in this guide seek to demonstrate that, in many jurisdictions, the use of the pre-pack process is now complemented by other mechanisms that may be employed to achieve corporate rescue. Restructuring plans and schemes of arrangement are powerful tools which, if used wisely, can avoid the problems that have been associated with some of the more high-profile pre-pack arrangements.