Karen Little

The recent news about viral beauty brand Morphe Cosmetics entering into administration through a pre-pack sale will no doubt have caught the attention of insolvency practitioners and business leaders across the UK.

Since its launch in 2008, Morphe Cosmetics took the beauty industry by storm offering quality make-up at affordable prices, with its eye shadow palettes and make-up brushes proving especially popular.

However, MC 2024 Limited (formerly Morphe Cosmetics Limited) entered into administration on 31 July 2024, with joint administrators being appointed.

Immediately upon appointment, the joint administrators completed a sale of part of the business and certain assets of the company, securing a total consideration of £715,000.

A “pre-pack” sale facilitates a swift sale of certain parts of a business in an insolvency situation. Negotiations will be carried out prior to the administration appointment with a view to obtaining an almost immediate sale.

This particular insolvency strategy can help reduce job losses and redundancies, employees’ contracts often transferring over to the new business under the TUPE Regulations. Avoiding redundancies is of course beneficial to the employees, but it also benefits the general body of the company’s creditors as the value of the preferential and unsecured claims should, in turn, be lower.

A pre-pack sale, too, can facilitate the continuity of the business (often assisted by the transferred employees) which can help to preserve its branding and goodwill, minimise the damage to ongoing relationships with, for example, the company’s customers and suppliers, and allow a viable business to continue in the form of a new company.

This type of sale is not without its drawbacks, however.

For example, unsecured creditors can feel disadvantaged, usually not being made aware of the deal until after completion. Similarly, creditors can be concerned that the best price may not have been achieved due to a lack of publicity or marketing of the sale subjects.

In summary, each case should be considered on its individual facts and circumstances. A pre-pack sale can be a useful tool in effecting a quick and smooth sale of a fundamentally viable business, but it’s important to carefully weigh up the advantages and disadvantages at the outset.

It is essential to act quickly and for directors and insolvency practitioners to act in the best interest of the company’s creditors when facing an insolvency situation.

Karen Little is a solicitor in Aberdein Considine’s dispute resolution and restructuring and insolvency teams.