Cart before the horse?

Pre-Packs: What are they and what do they look like in Ireland?

Part 1 – Pre-Pack Receivership

What is pre-pack?

Pre-pack is the term used to describe a corporate rescue mechanism that allows for the sale of a distressed business to essentially be agreed in principle and in advance of a formal insolvency procedure.

Admittedly, pre-packs are not as commonly known in Ireland as they would be in England and Wales.

However, where they are known, it is generally in connection with pre-pack receiverships.

How does a pre-pack receivership work?

Receiverships involve appointing a receiver over the assets of a company experiencing difficulties.  The process is typically initiated either by the secured lender or the borrower.

In a pre-pack receivership, a purchaser will be identified prior to the formal appointment of the receiver and terms of sale are agreed in principle in respect of the assets in question.

It is then the job of the receiver to implement these terms immediately on or subsequent to his or her appointment.

It is essential for a successful pre-pack receivership sale that the receiver is fully engaged in the negotiation of the sale agreement.

The receiver is under a general duty under Irish company law to secure the best price reasonably obtainable in connection with the disposal of the relevant asset.  Accordingly, it is advisable that an independent valuation is sought that will withstand any potential challenge.

These arrangements, which are fully documented, are then effected on or shortly after the appointment of the receiver.

Insofar as a disposal is contemplated to a connected person, Irish company law prevents a receiver from selling an asset of a company to an officer unless the receiver has given at least 14 days notice of his or her intention to do so to all known creditors of the company.

Benefits

• The process itself is cost and time effective.
• The assets can pass immediately upon enforcement.
• It allows for business continuity.
• It preserves employment.
• A sale to a connected person often means that there is an accelerated due diligence process.
• A costly and protracted insolvency process is avoided.

Where has it worked?

The sale of A-Wear retail chain by receiver Jim Luby was one of the earlier pre-pack receivership cases in Ireland and was deemed a success.

Examinership was considered unsuitable as the business did not have sufficient funding available to trade through a period of examinership.  Instead, a pre-pack receivership had the effect of preserving the value of the goodwill for the affected creditors and employees, and maximised the outcome for all.

Conclusion

Pre-pack receivership is a life line that might be considered in the event a company finds itself in financial difficulty and where its options are limited.

Early and meaningful engagement with creditors, advisors and any other relevant parties is essential and moreover, is integral to the implementation and success of a pre-pack receivership.

Reddy Charlton LLP advise on all aspect of corporate insolvency. For further information contact Elaine McGrath emcgrath@reddycharlton.ie