Vol 1 (2004) - Issue 2

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Pre-Packaged Business Sales Following the Introduction of the Enterprise Act 2002

Summary

This article summarizes the key issues to consider on a pre-packaged business sale, in light of the reforms introduced by the Enterprise Act 2002 (‘EA2002’). It concludes that the formal hurdles to pre-packaged sales by administrators have been reduced by the EA2002 reforms, but notes that there may be scope for abuse by unscrupulous insolvency practitioners.

Key features of a pre-packaged insolvency sale

A pre-packaged insolvency sale (‘Pre-pack’) is a sale the terms of which are agreed prior to the commencement of the insolvency process of the insolvent seller company. The most common form of insolvency process linked with Pre-packs has been administrative receivership with administration as the second most likely process to be used.
The sale occurs immediately following the appointment of the receivers or the administrators.
It is not unusual for a Pre-pack to involve a sale of the business to a party connected to the insolvent seller.
There is a risk of a Pre-pack being challenged by a liquidator, mortgagee, or a creditor of the seller company after the event, as there will not have been time for a full marketing process by the receivers or administrators and the lack of opportunity for such marketing may, in the view of the liquidator or disgruntled creditor, have prevented the seller company from achieving the best price for the business or assets sold.

Pre-EA2002 - receivership v. administration?

Administrative receivership will remain available as an enforcement option for lenders whose security includes a floating charge and was created prior to 15 September 2003.
Therefore, where the insolvent seller has granted security containing a floating charge prior to 15 September 2003, and where the circumstances are such that the secured lender has become entitled to appoint receivers pursuant to that security, there is ongoing scope for a Pre-pack sale by administrative receivers. There are several advantages of using administrative receivership as the insolvency process with a Pre-pack. Certain of the advantages pre-date the EA2002, and certain have arisen as a result of the provisions of the EA2002. Each is considered below.

Advantages of using administrative receivership with a Pre-pack

Little formality is required to effect the appointment of administrative receivers. The provisions of the security document will need to be checked as receivers may only be appointed once the security has become enforceable on its terms. Usually, it is sufficient either for the lender to have demanded repayment and for that demand to have gone unsatisfied, or for the seller company to have invited the lender to appoint administrative receivers. Where the lender proposes to issue a demand, because this is required to make the security enforceable, it is not uncommon, where the appointment of the receivers is not opposed by the company, for the lender to ask the company to also provide a written invitation to the lender to appoint receivers, as a means of evidencing that the appointment was not hostile and was made with the cooperation of the company and its directors.
Once the security has become enforceable, the security usually provides that the lender may appoint one or more receivers by a written instrument signed by an officer of the lender. There is no statutory form prescribed for the appointment of receivers.
Once the appointment document has been received by or on behalf of the receivers, in order for the appointment to be effective from the time that the appointment document was received, it must be accepted by the receivers in writing before the end of the business day next following the date of receipt of the appointment document.