YRM hit the headlines when it opted for a controversial pre-pack deal, so who is supposed to benefit from these transactions and how can you protect yourself as a creditor?
On 23 December 2011, architect YRM went into administration. It sold its core contracts to RMJM, in a 鈥減re-pack鈥� sale. As part of that deal, some of YRM鈥檚 management team moved to RMJM. YRM鈥檚 other employees were left without jobs.
YRM鈥檚 management - and the concept of the pre-pack sale itself - faced criticism in the aftermath of the deal. But what is a pre-pack? Does it have any benefits? And how can you protect your business against the risk that a business partner becomes insolvent and takes that route?
What is a pre-pack?
A 鈥減re-pack鈥� sale is a way of selling an insolvent firm鈥檚 business or assets. Typically, the proposed administrator of the company negotiates the sale before the company goes into administration and completes the deal almost immediately after his appointment.
A pre-pack sale is often used where a firm has insufficient cash to allow it to trade in administration, or where the business could not easily survive formal insolvency.
The circumstances of a pre-pack deal can mean a company鈥檚 existing management team, who know the business inside out, are often best placed to complete a deal. However, if they do, it can seem like a means for the management to retain control of the firm while walking away from most of the debts.
Who benefits from a pre-pack?
Pre-packs can be the best way of realising value for creditors from an insolvent firm.
A sale of a business as a going concern will typically achieve a higher price than a sale of assets on a break-up basis. A pre-pack can sometimes be the on