We increasingly hear about pre-pack administrations, but what exactly are they? Purnells’ licensed insolvency practitioner Chris Parkman explains all
A pre-pack administration sale is a way of selling the business and assets of a company to a third party immediately after it has been placed into administration.
A pre-pack administration can be advantageous as it ensures continuity of the underlying business but rids the new owners of the debts of the insolvent company.
In that connection, the sales contract is drawn up and finalised prior to the company being placed into administration and is signed immediately or shortly after, the administrators appointment.
But what about the creditors of the insolvent company?
Pre-pack administration sales are recognised in the insolvency profession as being an effective and speedy means of rescue however they have always been particularly unpopular with creditors, as historically they have often had no say in the matter and are informed of the sale, only after it has happened.
Creditors would often feel particularly aggrieved if the pre-pack sale was to a new limited company that had been incorporated by the directors of the insolvent company!
Statement of Insolvency Practice No 16 (“SIP 16”) was commissioned by the Joint Insolvency Committee and sets out basic principals and essential procedures that insolvency practitioners are required to comply with when entering into a prepackaged sale agreement. Its aim is to prevent the perceived possible misuse of “pre-packs”.
SIP 16 was introduced with a view to providing creditors with as much information as possible in connection to the sale. The information that must be provided to creditors is extensive and the administrator must be able to explain and justify why a pre–packaged sale was considered appropriate. Creditors are furnished with a comprehensive report in that regard with the first notification of the administrators appointment but is this really good enough? At the end of the day, despite now being provided with a full and detailed account of the transaction, creditors are still, more often than not, first learning of the sale, after it has been concluded.
Proposed pre-pack reforms
On March 31, Edward Davey, Minister for Employment Relations, Consumers and Postal Affairs; Department for Business, Innovation and Skills, proposed that the procedure for pre-packaged Administration sales be reformed in order to ‘improve transparency and confidence in prepackaged sales’.
The intention is that creditors have an opportunity to voice any concerns and to ensure that pre-packaged administration sales are entered into “fairly and reasonably.”
It is intended that administrators now be required to give notice to creditors where they propose to sell a significant proportion of a company’s assets or its business to a connected party, in circumstances where there has been no open marketing.
By giving creditors notice of the proposed sale it will enable them to express any particular concerns, or indeed make a higher offer for the assets and the administrator would need to give proper consideration to any issues raised. The recommended notification perio for creditors is currently understood to be just three days, which does beg the question,
I think, as to whether the proposed reforms really go far enough to improve the position of creditors of an insolvent company when a pre-packaged administration sale is envisaged.
This article first appeared in the August/September 2011 issue of Business Cornwall magazine