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Spark! Pre-Packaged Rescue

This is the most under-utilized tool available to businesses within the insolvency framework, pre-packs as they are called in the US, are extremely useful to distressed firms. They reduce cost radically, speed up implementation, greatly increase the likelihood of planning approval and reflect very favourably on the distressed businesses leadership team.

Common mis-conceptions

These include:

  • “A business cannot engage with a rescue Practitioner before the board passes a resolution to enter rescue”;
  • “Creditors and banks are suspicious of businesses entering rescue with well formulated plans in place";
  • "Pre-packs are used only in divestitures and sales and not used in restructuring of businesses".

Early BRP engagement

Can a BRP who has engaged with the company, creditors or shareholders prior to the commencement of business rescue be appointed as a practitioner?

Section 138 of the Act sets out the requirements for qualification as a business rescue practitioner. In particular Section 138(1)(e) provides that “A person may be appointed as the business rescue practitioner of a company only if the person...(e) does not have any other relationship with the company such as would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship”.

A business rescue practitioner will not, merely by virtue of his prior engagement with creditors or shareholders, be held to lack independence. Something more, some “other relationship” will need to exist.

Attitudes of the Banks

Banks (and clever creditors) will look very favourably on a business that has been transparent and proactive in entering rescue with properly formulated plans. Indeed it addresses their biggest complaint about rescue which is the great lack of comfort in plans presented to them. This addresses this issue head on.

What's in a Pre-pack?

Everything needed to guarantee approval from a creditor, which means, a plan that provides the following.

Section 1: Legal Standing and motivations for embarking on a pre-pack

  • Summary of Lines of Business and Industries Served
  • Relevant Historic Milestones & Events
  • Current legal & operational status of the business
  • Informal Workout vs Formal Business Rescue
  • Risks that form part of the planning considerations

Section 2: Summary review of our Pre-Pack Scope.

  • Our Pre-Pack work-streams
  • Our Communications to Stakeholders so far
  • Summary view and status of work-stream progress

Section 3: Delivery and Uplift Detail

  • Restoring the Economic Engine
    1. Cost of Goods Sold
    2. Operational Expenses
    3. Inventory Holding Days
    4. Receivable Days
    5. Days Payable
  • Regaining focus on our Core Business
    1. Value Chain Rationalization & Re-vitalisation
    2. Divesting newly defined non-core assets & Balance Sheet Clean-up
    3. Renegotiated and Consolidated Outsourcing arrangements and Strategic Relationships
  • Financial Restructuring & Debt Refinancing
    1. Short-term < 3months,
    2. Medium 3-9months
    3. Longer term> 9months

Section 4: Governance and Reporting, Appendixes & Supporting documentation

  • Monthly Reporting to Creditors
  • Tracking of Benefits
  • Affected Parties & Stakeholder matrix
  • Communication Plan

Here's an example of a Pre-pack