Controversial businessman Mike Ashley has been the focus of press attention after it emerged that he has been involved in the purchase of Agent Provocateur in a £31 million ‘pre-pack’ deal.
A ‘pre-pack’ deal is a transaction in which the business and assets of an insolvent company are sold to a buyer immediately upon the entry of the insolvent company into Administration, a formal insolvency process. Often there are only minutes between the Administrators being appointed and formal completion of the sale. The reference to ‘pre-pack’ is to the fact that the sale is ‘pre-packaged’ or, more accurately, the process of marketing the business, the bidding procedure and negotiations are all conducted and essentially concluded prior to the commencement of the Administration, before the Administrators are in office, and before creditors are made aware of the failure of the business. All that remains to be done to complete the deal after the appointment of the Administrators is the dating of the transaction documents.
The buyer is often a new company with potentially uncertain future viability. It then carries on the former business of the insolvent company having made a ‘fresh start’, while the debts of the insolvent company are dealt with by the Administrators. Creditors are notified after the event, and have no claim against the buyer now operating the business.
Of the 20,000 or so companies that go into a formal process each year, approximately 600 to 700 are pre-packed. Therefore there are not significant numbers of pre-pack deals. However, when they do take place, such as with Mike Ashley’s recent deal, they tend to receive attention. Often this is negative attention, because the business is typically marketed discretely and the deal is then negotiated in secret. Creditors of the insolvent company are not consulted about the process, and after a sale has been effected it is difficult to challenge the Administrators’ decision to sell. This differs from other formal insolvency processes in which creditors are given notice of impending insolvency and are more routinely involved. Another reason for criticism is that often the sale of the business and assets is back to the management team, who are then able to take advantage of the ‘fresh start’ while creditors may receive little or nothing.
Nonetheless, pre-packs do allow businesses and jobs to be saved, and often in doing this a better return to creditors is possible than would be achieved if the business had gone into Liquidation. They are also usually fast in timescale and cheaper than some other forms of restructuring. The preservation of jobs reduces the number of creditors (and therefore increases the share of what is available for other creditors) and also avoids the need for payments by the government to employees who would otherwise be made redundant due to the insolvency. In order to encourage entrepreneurialism, it is necessary for there to be a framework for projects and businesses to fail and be rescued.
With Agent Provocateur, the majority of the UK-based jobs are saved and 11 stores will continue to operate. This may not have been the case if a pre-pack had not been possible.
Against this background, are pre-packs worth pursuing? Pre-packs were the focus of the 2014 Graham Report, which considered the criticism and advantages. The overall conclusion was that there is a place for pre-packs in the UK’s insolvency landscape and therefore, although they will probably remain controversial, they are here to stay.
Katie Farmer is an associate in the restructuring and insolvency team at Ashfords.