The sometimes, high profile, of these cases can lead to a misconception that assets are just sold back to company directors for rock bottom prices. This is rarely the case however and this article will aim to deal with these misconceptions.
In 2014, Teresa Graham produced a report commissioned to the then Business Secreatry Vince Cable on the implications of pre-packed sales in administration to connected parties.
Following the “Graham review” pre-pack sales are even more highly regulated and insolvency practitioners are fined and reprimanded for not following the professional standards set out in SIP 16.
If a pre-pack sale is made to a connected party the insolvency practitioner must:-
- Demonstrate that the sale represents the highest achievable value for the business.
- Invite parties to make submissions to the pre-pack pool to review the appropriateness of the sale and report on whether this has happened.
- Invite the party to submit financial projections for the new business and report on whether these were submitted.
A major point that seems to have been missed is that the majority of pre-packaged sales do not take place via administration.
The chart below shows the number of pre-packaged sales via the administration process to a connected party as a proportion of total insolvencies for 2016.
The vast majority of insolvencies are through Creditors Voluntary Liquidations (CVLs) which in a question and answer session was confirmed to be overlooked as a route for pre-pack sales in the Graham Review.
Whilst there are no official figures, in our experience, in excess of 50% of asset sales in Creditors Voluntary Liquidation result in a sale to a connected party.
As this has not been covered in the Grahame review, we feel it’s important to raise awareness on the process leading to this type of sale as well as the processes which we go through before conducting these sales.
When assets are sold in a pre-pack in liquidation there are good reasons for this which we’ll explore later.
Firstly it’s necessary to establish what classes as an asset can be included in these sales. Twenty years ago this list may have looked something like this:-
- Plant and machinery
- Liquidation stock
- Furniture, fixtures and fittings
- Land and property
- Trademarks and patents.
- Work in progress.
In a modern insolvency case this would be a very basic list and there are further assets which need to be added to this list including, but not limited to:-
- Company websites and social media accounts.
- Email addresses.
- Business phone numbers.
- Crystallised developmental costs.
- Online databases and marketing lists.
- Other online presence such as reviews and accreditation.
It’s important for all of these assets to be realised to ensure the maximum amount possible is realised for creditors.
Once the nature of the assets has been established, where there are substantive assets, the next stage is to obtain a valuation from the suitably qualified surveyor with appropriate insurance cover in place.
This will be carried out either on site valuation or on a desktop valuation depending on the nature of the assets and whether the value warrants the additional cost of a site visit.
The agents will provide three different valuations for the assets on the following bases:
- In situ
- Collection at the buyers expense
- Collection and delivery of the assets to the buyer
In all cases an “in situ” valuation will be much higher than the other two bases as there is no interruption or legal costs.
This is the first justification for resale to connected parties as they will need to pay a premium for the assets rather than the discount a third party may receive for having to move the assets and the costs associated with this.
The next stage will be to market the business for sale.
Depending on the circumstance this could be as a whole business or selling off assets at auction.
The availability of the assets will be broadcasted in several different ways:-
- Specialist insolvency selling websites
- Social media
- Marketing lists held by the insolvency practitioner or their agents
- Direct contact with competitors of the business or anyone who has previously expressed an interest in selling the company
This method ensures that the availability of the assets is sent to the wider audience as well as more targeted marketing. In cases where confidentiality may affect the sale of assets the sales particulars may initially be fairly limited. Interested parties may be asked to sign a confidentiality agreement before receiving full particulars.
Modes of Sale
Once the assets have been marketed, the next stage will be the process for dealing with offers.
The way this is dealt with depends on whether the business is being sold as a whole entity or on a breakup basis.
Where a business is being sold as a whole, or even just one, very significant asset, sealed bids will be the usual mode of obtaining the best offer.
This will usually involve a tight deadline for all interested parties to submit their best and final offers. There is no negotiation or discussion once the bids are received.
This is most effective where there are multiple bidders for the same assets as rather than having protracted negotiations, with buyers trying to get a cheap deal, they will submit the most they are willing to pay to avoid losing out.
The bids will not just be judged on the availability of funds, but also other matters such as favourable payment terms, availability and the source of funds and the level of security they are willing to grant.
The successful bidder will generally be required to put down an immediate deposit and the matter will be passed to solicitors to prepare an asset purchase agreement.
Break up basis
Where there is no prospect of selling the business as a whole entity, the assets will generally be sold off separately. The mode of sale can take several forms including:
- Closeout sales to similar retailers in wholesale lots
- Online auction
- On site auction
- General sale via the valuers own marketing
There are also a number of firms who will specifically purchase liquidation stock in wholesale lots, taking a risk on the condition, to then sell on the general public via their own mediums.
Unfortunately these sales will often generate much lower realisations and have higher costs than the sale of a business as a whole entity.
In these circumstances, where the director is willing to make a higher offer, which is often the case, this will result in a sale back to the director of the company as the best route for realisation.
Regardless of the sales route used, once a deal is agreed the insolvency practitioner will need to collect in the payments for the assets and distribute them under the order of priority defined in insolvency legislation.
At all times the overriding priority is to achieve the best possible outcome for creditors as a whole and this must be considered at all times when dealing with assets in an insolvent estate.
The truth of the matter is, connected parties are usually willing to pay more to keep their business model than a third party is to take over.