Buyers must do their own due diligence. Creditors and shareholders should accept the possibility of no or minimal recovery.
The main benefits of a pre-packaged sale are certainty of outcome and avoidance of business disruption.
A pre-packaged sale is agreed before the company is put into administration and is completed immediately after the administrator has been appointed. The sale can be of assets or shares in subsidiaries or a mixture of both.
It is a common way of restructuring a business whilst also transferring ownership, potentially to a buyer with better funding, market position or simply with an appetite to improve the return from the business. It can also be used to impose a financial restructuring on non-consenting shareholders and/or junior lenders.
The main benefits of a pre-packaged sale are certainty of outcome and avoidance of business disruption arising from the advent of insolvency.
Pre-packaged sale
Again, the sale may be by way of assets or share disposal. The fundamental legal terms of the sale (very much buyer beware and at your own risk) are the same as in a pre-packaged business sale but this time the administrator has at least been in office for a period so will have greater visibility on the business. Whilst legal recourse for the buyer will usually remain limited there should be greater awareness, including of matters such as third-party claims:
Later administration sale
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retention of title creditors
intellectual property rights owned by others that a buyer will want to continue to use
trading counterparties that have terminated their contracts
employees who have chosen to leave because of the insolvency.
In a ‘pre-pack’ sale the valuation of the assets is key, as the administrator must obtain a fair market value on sale.
Administration
An administration is a statutory procedure available to an insolvent company. It can be initiated by a company, its directors, or its creditors.
Administrators are licenced insolvency practitioners who are appointed to, in order of preference:
— rescue a company
— achieve a better outcome for creditors than by winding-up of the company, or
— dispose of the company to make distributions to certain creditors
During the administration the company benefits from a pause in any legal action against it or its assets without consent of the administrator or the court.
It is not unusual in insolvency proceedings for no recoveries to be made by unsecured creditors or shareholders.
The main categories of creditor are secured, unsecured and preferential, with each containing certain sub-categories.
As the disposal of company assets can only take place subject to the release of some kind of security held over them, secured creditors will exert significant influence in any sale negotiations.
Where distributions are to be made in an administration or liquidation, creditors rank for payment in the following descending order of priority:
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creditors with fixed security over specific assets
expenses of the insolvency process (including the insolvency practitioner’s fees, and any legal or other professional fees)
certain ‘preferential’ creditors, including employees and the United Kingdom’s tax authority
the prescribed part (a ring-fenced fund up to certain limits set aside for unsecured creditors)
Creditors
Claims for unsecured debts rank equally among each other. In practice, it is not unusual in insolvency proceedings for no recoveries to be made by unsecured creditors or shareholders.
Shareholders will usually have no formal duties in an administration. They will also be the last to receive any distributions on a sale or other insolvency estate realisations (as shown above).
Shareholders
However, certain contractual arrangements (such as shareholders’ agreements) may complicate the disposal of assets, and it may be necessary to engage with shareholders.
rescue a company
achieve a better outcome for creditors than by winding-up of the company, or
dispose of the company to make distributions to certain creditors
During the administration the company benefits from a pause in any legal action against it or its assets without consent of the administrator or the court.
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creditors with floating charge security over changeable classes of assets
unsecured creditors
interest on certain debts incurred during the insolvency process, and
shareholders.