Buyer beware: key issues for purchasers in pre-pack sales

With administration figures creeping back up after falling to low levels during the pandemic, the number of pre-pack sales of businesses in administration also appears to be on the increase. In such transactions, a purchaser acquires all, or substantially all, of the business and assets of the insolvent company from the administrator, with the terms of the deal being agreed pre-appointment and completion usually taking place immediately after the administrator takes office.

The acquisition of a distressed business can clearly be a potentially attractive proposition from a value perspective. However, such deals have their own risks and peculiarities. Purchasers who come to the deal expecting certain features of a solvent acquisition – such as the opportunity for thorough due diligence, or extensive representations and warranties from the seller, will be disappointed. This article briefly highlights some of the key issues faced by a purchaser when acquiring a business by way of a pre-pack sale.

• Identifying assets to be purchased (and excluded). In a pre-pack, the purchaser has the opportunity to acquire key assets of the company - including name, goodwill and intellectual property – enabling the business to continue as a going concern, whilst leaving debts and liabilities behind in the insolvent shell. Ensuring that the assets to be included in the sale (and, just as importantly, those to be excluded) are correctly identified is crucial.
• Due diligence will be limited. The purchaser will receive no representations or warranties from the administrators of the company as to the assets purchased, which are sold on an “as is” and “where is” basis. The (proposed) administrators themselves often have limited information regarding the business to be sold. The ability of the purchaser to carry out due diligence will therefore depend on the cooperation and responsiveness of the insolvent company’s management, but due to the typically short period afforded to complete such a transaction, it will be limited.
• Expect to provide indemnities in favour of the administrators. The administrators of the seller will not take on any risk and will expect to be indemnified by the purchaser against any liabilities arising in relation to the transaction or to the assets themselves. Among other things, indemnities covering any employment liabilities relating to the transfer of business (see below) will be non-negotiable.
• Contracts with key customers or suppliers will not transfer automatically to the purchaser - and an assignment or novation of each contract will be necessary. There is no guarantee that a contractual counterparty will be willing to keep trading with the new business, or - even if it is - that it will not take the opportunity to renegotiate terms of contracts and perhaps try to recoup some losses.
• Purchasers usually enter premises under a licence to occupy, rather than taking an assignment of the lease. The seller may be able (with landlord consent) to assign any leasehold property – however obtaining landlord consent to assignment is usually not feasible within the accelerated timeline of a pre-pack sale. A licence to occupy the property for a specified time may be granted, giving the purchaser time to negotiate with the landlord - although with no guarantee that landlord’s consent will be forthcoming.
• Employee liabilities often transfer to the purchaser. In most circumstances, all employees of the business will automatically transfer to the purchaser as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The purchaser takes over all the seller’s rights, obligations and liabilities pursuant to the transferring employment contracts. Potential liability relating to the transferring employees will be a key concern for the purchaser, and is often reflected in the purchase price.
• Licences may need reinstating. The purchaser will need to ensure that any licences required are in place to enable the business to keep trading. Premises licences (for the sale or alcohol or provision of regulated entertainment) automatically lapse upon the appointment of an administrator, so the transfer or reinstatement of the licence will need to be carefully coordinated with the sale.
• An ‘evaluator’s report’ may be required. Where the purchaser is a connected party (e.g. existing management), the Administration (Restrictions on Disposal etc to Connected Person) Regulations 2021 (the “Regulations”) apply, requiring the purchaser to obtain a report of an independent evaluator on whether the terms of the sale are reasonable.

Speed is of the essence in a pre-pack sale, with the deal usually needing to be concluded in a tight timeline prior to the appointment of the administrators. Having advisers who understand the process and are experienced in conducting negotiations in these circumstances is key to ensuring a successful transaction.

Our restructuring and insolvency team regularly act both for purchasers and for the seller/administrators in relation to pre-pack sales – please contact Tim Carter, Helen Martin or your usual Stevens & Bolton contact if you require further advice and/or support.