Intro
Due to a number of high-profile administrations reported in the news recently, affecting retailers such as Ted Baker, Body Shop & Muji, many people will be familiar with the term "pre-pack administration sale". But outside of the Restructuring industry, few are aware of what a pre-pack actually entails.
We take a look behind the scenes: what does a pre-pack sale involve, and how is the process used to rescue businesses in financial distress?
What is "Pre-Pack" administration?
- Taking a step back, an administration is a restructuring process where administrators take control of a business from its directors.
- The administrators' job is to achieve one of three statutory purposes. One is to rescue a viable business, that is insolvent due to cashflow problems, as a going concern. Often the purpose achieved tends to be to either to make a distribution to secured or preferential creditors, or to achieve a better result for the company's creditors as a whole than would be likely if the company were wound up.
- A key role of the administrators is to recover assets and realise them to pay off creditors who are owed money. One of the most common ways of doing this is via a "pre-packaged administration sale". This an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of the administrator, with the sale contract executed on the appointment of the administrator or very shortly afterwards.
- The buyer of the business or assets is often (but not always) a connected party, with common directors or part of the same corporate group.
- There have been a number of high-profile administrations in the press recently, Wilco being an example of what happens when an administrator cannot secure an offer for the assets that is sufficient to cover the company's liabilities.
- The key benefit of a pre-pack is that the purchaser can take on the profitable and necessary elements of the business, while leaving behind loss making or undesirable elements (such as expensive leases or onerous contracts).
Case Study – Muji Europe Holdings Limited
The restructure of Muji Europe Holdings Limited (MEH), the corporate entity behind the popular Japanese homeware brand, is an example of how administration can be successfully used by retail businesses that require corporate reorganisation.
Howard Kennedy successfully steered Muji through the process , which saw the assets of MEH (including its shares in its various European subsidiaries, which traded across 10 different jurisdictions) being sold as part of the pre-pack sale. This required coordination with foreign lawyers alongside the teams from Howard Kennedy and Ernst & Young in London.
The successful completion of Muji's strategic restructuring ensured continuity for all stakeholders, including customers, employees, and business partners. The sale and purchases of Muji's European operations were successfully completed via a pre-pack administration process, preserving the integrity of Muji's European presence.
Thanks to this administration, all European Muji stores remain open without any job losses or significant trade disruptions. From the day before administration to the day after, it was business as usual for all European Muji stores.
Conclusion
Whether financial challenges emerge suddenly or develop gradually, it is critical for business owners to stay vigilant and regularly monitor financial performance. Seeking professional advice early can expand the options available for the potential rescue or restructure of a business.
As shown by the European Muji pre-pack sale, administration serves as a valuable tool for ensuring business continuity and minimising disruption for both customers and employees.
The Restructuring & Insolvency team at Howard Kennedy are on hand to assist both insolvency professionals and business owners at every stage of the administration process, and deliver a positive outcome in what is often a challenging period.
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