Internaçionale (which had been making reported losses of some £10 million a year), recently entered administration. Corporate restructuring specialist FC Fund Managers previously took control of Internaçionale, after buying £35 million of debt, and PwC were appointed administrators.

Deja vu, I hear you say? It has certainly been an interesting few months for Internaçionale (and its creditors). In July 2013, it was subject to another pre-pack deal. Joint administrators from Ernst & Young immediately sold the company’s business and assets as a going concern to Internaçionale UK Limited, a new company set up by existing shareholders. In the words of Oscar Wilde: “To lose one parent may be regarded as a misfortune. To lose both, looks like carelessness.”

In further developments, ethical lifestyle business Celtic Sheepskin has been bought in a prepack administration deal by its former owners, after the Newquay-based company ran into financial difficulties in early 2014. It has been reported that previous management, Kath and Nick Whitworth- who took over the company in 1990, have bought back the business and assets from administrators. The business now trades under Celtic Sheepskin and Co.

Internaçionale and Celtic Sheepskin are unlikely to be the last fashion businesses to enter into administration this year in a market that continues to be difficult for many. 

Many fashion companies may be wondering, why are pre-packs so popular and is it a viable option for us?

Why go down the pre-pack route?

For companies with insufficient funds available, viable options to rescue the business may be few and far between.

A pre-pack process will often allow management to:

1.  Avoid paying most of the debt

One of the main attractions of pre-packs is that it allows companies to leave much of their debts behind. In contrast with other procedures, such as company voluntary arrangements, there are no negotiations with unsecured creditors, who are usually just presented with a done deal

Secured creditors still need to be involved in the process, given that their consent is required for the release of their security. Furthermore, as may have been the case with Internaçionale, pre-packs may turn out to be more of a short-term fix for the company. They often do not result in a long term restructuring of the company. The company may also find itself suffering material reputational damage.

2.  Acquire the business and its assets/staff (often utilising the same/similar name) 

Administrators should observe and comply with the Insolvency Service’s Statement of Insolvency Practice 16 (SIP 16) when selling assets, particularly when the sale is to existing owners/management. These professional guidelines prescribe the steps which need to be taken to:

  • ensure a fair price is paid for the assets; and
  • the details which the administrator should disclose to creditors, when a pre-pack sale has occurred.

3.  Re-negotiate the terms of its leases.

Often landlords will be asked for a material reduction in rent if the newco is going to agree to stay in occupation post pre-pack.
Landlords can take some comfort from the recent culmination of the two-year legal battle by Landlords- Land Securities, Hammerson, Intu and British Land against the electronic game retailer, Game. This established that retailers in administration, must pay rent on a ‘pay as you trade’ basis. The consequence of this decision was a large £3 million rent bill for the computer games’ company.

Next step?

In today’s economic climate and the harsh trading conditions, who can really blame a business for wanting to dig itself out of a hole and ditch most of its debts?

Pre-packs have been on the rise for some time, with the Insolvency Service once estimating that almost 1 in every 3 administrations involve a pre-pack sale.

They are likely to remain a continuing trend, at least until tighter regulation is introduced to control them.

However, they are not without their issues and care needs to be taken to get it right.


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