The Irish Examiner publication is the latest business to be restructured using a so called pre-pack insolvency transaction. “Pre-pack” transactions have been a feature of insolvency sales in other countries such as England and Wales for some years, but until relatively recently had not commonly featured in Irish insolvencies. It has been reported that at least one creditor has initiated proceedings to challenge the Irish Examiner transaction. If that case proceeds to trial, it will be one of the rare Irish cases in which the courts are asked to analyse the validity and basis of a pre-pack.
Pre-pack structures can allow a change in ownership of a business, a continuance of trade and the preservation of employment without the loss in value that can arise where a business is operated during an insolvency process while a purchaser is being sought. In Ireland a corporate insolvency process includes a receivership, liquidation or an examinership. While there is effectively no reason why a liquidation or examinership process cannot be used to implement a “pre-pack”, such sales are usually implemented through receiverships.
Receivership pre-packs typically involve a bank or other secured lender appointing a receiver over the assets of a company experiencing financial difficulty. Prior to the formal appointment of the receiver, a purchaser is identified and terms of sale are agreed for the sale of the assets in question. The receiver then implements the pre-agreed terms immediately on or subsequent to his appointment.
The advantage to the “pre-pack” structure is that the sale can be completed without material interruption to the trading activity of the target company or asset, thereby preserving value and safeguarding jobs. The devaluation of goodwill and the deterioration of key relationships with employees, suppliers and customers that can result from a protracted corporate insolvency process is avoided and creditors can achieve a higher return than might otherwise be the case.
There are some cases where a “pre-pack” is not appropriate and there are risks associated with implementing a “pre-pack”. Such cases include those where creditors may be prejudiced due to a lack of time to market the assets in question. This concern is more acute where the sale is to a party connected to the insolvent business such as the management, directors or shareholders. Insolvency practitioners must be able to demonstrate compliance with their statutory duty to obtain the best price reasonably obtainable at the time of the sale of the asset. For this reason, great care must be taken to ensure that appropriate valuations have been obtained for the assets. The insolvency practitioner must also ensure that he is aware of and has taken account of any previous marketing activities carried out in relation to the assets, whether by the company or the lender.
In England and Wales (where unlike in Ireland insolvency practitioners must hold a licence), detailed guidelines for the conduct of pre-packs have been adopted by the professional bodies responsible for the licensing of insolvency practitioners. Those guidelines were introduced to increase transparency for creditors and confidence in the marketplace regarding the use of pre-pack administrations.
In the absence of any such guidelines in Ireland, the critical standard for the insolvency practitioner is to ensure that he obtains the best price reasonably obtainable for the assets at the time of sale, a duty imposed on him by the Companies Acts. Pre-packs are not suitable in all cases and it will not always be possible for the insolvency practitioner to carry out any marketing of the assets, the subject of the sale, or to obtain comprehensive valuations for the assets in advance of the sale. Furthermore, certain company law provisions might, in some circumstances, work to delay a sale, for example where the sale is to a connected party. In such cases a lengthier period of time will be required to market and sell the assets.
Whilst examinership has been used for certain forms of transaction very similar to a pre-pack, an examiner has a duty to ensure that the investment he recommends is in the best interests of the company and its members and creditors as a whole. This means that he will be required to follow a process of testing the investment options available before finalising his scheme of arrangement.
The absence of formal reporting requirements for pre-packs means there are no statistics available on the use of the process in Ireland, but there are reports of pre-packs having been effected in Ireland in recent times, particularly in relation to retail businesses. Investors seeking to purchase assets from entities in financial difficulty with a view to preserving the value of a company’s goodwill and business are increasingly considering pre-pack arrangements as a suitable opportunity for investment.
Contributed by: Maureen Daly
