Back in April 2020, the International Monetary Fund expected that due to the COVID-19 pandemic, global economy would plunge into the greatest economic crisis since the 1930s, with up to USD 9 billion evaporating by 2022. However, this seemingly adverse situation may be an opportunity to purchase assets—when enterprises are forced to sell them, often at very attractive prices. Transactions like that may be carried out using a tool offered in bankruptcy law: pre-pack. Let’s have a closer look at it.
Distressed assets: invest through restructuring
Audaces fortuna iuvat, says a Latin proverb: “fortune favors the bold.” This is very true today, when many investors—considering the current situation—back away due to the risks related to the acquisition of new assets. However, in a crisis, it is also much easier to purchase distressed assets that are offered at very attractive prices.
What is more, this is beneficial for both the debtor and the investor, as the latter does not have to face the debts of the previous owner. In order to cut off the obligations and encumbrances related to the acquisition of assets, it’s worth purchasing them as part of bankruptcy proceedings, i.e. with enforcement effects. The tool used in this respect is pre-pack, or pre-packaged liquidation.
Pre-pack: buy with no encumbrances and amounts due
Simply speaking, the pre-pack is a bankruptcy law instrument the idea of which is to sell an entire enterprise or a part of it to a specific buyer named in the application, without encumbrances and obligations. This is the fundamental difference versus a traditional sale of an enterprise and the main benefit of pre-packaged liquidation. In the case of a standard procedure, the buyer, unlike in the case of a pre-pack, is liable also for the obligations of the seller.
As a result, when purchasing shares—like in the case of a typical transaction of sale—the rights, but also the duties, of the seller are transferred to the buyer. This is why, before making the decision to purchase, it’s a good idea to commission specialists, e.g. the experienced lawyers from the Konieczny Wierzbicki Law Firm, with a full due diligence review. However, in the case of a pre-pack, such an extensive analysis is not necessary, as the obligations and encumbrances are not transferred to the buyer.
Assets of a pre-pack from the point of view of a debtor
From the point of view of a debtor, the main benefits of a pre-pack are the possibility of selling the enterprise to a selected entity, much lower costs of bankruptcy proceedings, and keeping the enterprise a going concern, which includes keeping the personnel employed.
In the opinion of Mariusz Purgał, an Attorney-at-Law at the Konieczny Wierzbicki Law Firm who has been guiding enterprises through restructuring and bankruptcy proceedings for a long time, “Acquisition of assets under the pre-pack procedure is in fact beneficial to everyone. To the creditors, who—thanks to a shorter procedure and lower costs of bankruptcy—can be satisfied to a greater extent; to the debtor, who, in a sense, may ensure continued operations of the enterprise he had been building for years; and to the buyer, who may purchase valuable assets at an attractive price and without any debts. In these difficult times for business, this may be a good way to invest surplus capital.”
Who can buy an enterprise as part of a pre-pack procedure?
Good news for potential buyers is that under the pre-pack procedure, an enterprise may be purchased both by its affiliates and non-affiliates. Statutory regulations provide for no restrictions in terms of potential investors. What is more, the application for approval of the terms of sale may concern more than one buyer, including buyers that are not creditors.
According to Mariusz Purgał, Attorney-at-Law, who handles restructuring processes as part of his everyday work, including under the pre-pack procedure, “A wide range of potential buyers means an opportunity to find the best offer to sell the enterprise or a part of it and, at the same time, allows potential investors to find interesting assets on the market. It’s also a way of taking into account, to the maximum possible extent, the interests of all participants to a bankruptcy.”
Are you interested in taking advantage of the pre-pack procedure? Would you like to know more? Contact our specialist on a no commitments basis: