Pre-Pack Administrations: Friend or Foe?

Much has been written recently with regards to pre-packaged administrations. This is the colloquial term given where the sale by a company administrator of assets immediately (or at least very soon after) being appointed, which has been arranged prior to the administrator’s appointment and is usually to the company’s management or shareholders. Recent high profile pre-packs include Whittards and The Officer’s Club. This phenomenon was developed following the passing of The Enterprise Act 2002. Under this Act, the emphasis of insolvency moved towards recovering and rescue much more than it had done in the past. A lot of column inches have been dedicated as to whether pre-packs are a force of good or evil and depending upon your standpoint in regards to an insolvent company this will usually determine your opinion of them. Creditors Creditors of a company in administration are already smarting from the fact that they have potentially lost a large amount of money on the basis that the company has failed, they also often blame the management of the company for their predicament. Through the use of the pre-packaged administration, the management can often obtain a “clean” company/collection of assets whilst the creditors seem to lose out. Management From the management’s point of view, it enables the managers to retain a majority of the workforce and to trade without the constant struggle of trying to rob Peter to pay Paul whenever an invoice comes in. Generally, the pre-pack will assist in rescuing the company for the benefit of the workers as often if the company is not sold by way of a pre-pack administration all of the employees will lose their jobs if the company could not be sold. Whenever an insolvency practitioner (IP) is appointed in an administration, they are doing so for the benefit of the creditors as a whole. An IP is, first and foremost, an officer of the court and they are strictly regulated and highly trained professionals. They will act in the best interests of all of the creditors to the extent they are allowed to by law. Recently, R3 (the Association of British Recovery Professionals) produced a Statement of Insolvency Practice (SIP) No. 16 on the issue of pre-pack administrations. These SIP guides provide IPs with the best practice guidelines to assist the IP in practicing in these situations. The aim of this guideline was to help reduce the criticism of pre-packs. A couple of major criticisms which relate to pre-packs are as follows: 1. By failing to put the sale on the open market, one cannot be sure that the best price has been achieved. The response to this is that speed is one of the core elements to a pre-pack to enable the company to trade as quickly as possible and to safeguard jobs. 2. Selling back the business to the connected parties. In light of the fact that it is usually a done deal before the administrator has had the opportunity to get settled, people perceive this to be done subversively and therefore in some ways underhand. In a declining market, things are constantly being sold for under their “market valuation”. For example, the average value of domestic property fell by 18% in 2008 and many properties currently on the market are underneath their estimated market value. The certainty and speed offered by a pre-pack can actually be good news. The administrator must follow the SIP 16 guidelines and any creditor who is dissatisfied should speak to the administrator in the first instance. A creditor is rarely in possession of all of the facts and once he has been furnished with these by the administrator together with an explanation of what the IP has done, many of the fears can be allayed. If a creditor knows any wrongdoing by the previous officers of the company then they must inform the IP so that this can be investigated in the usual way. If the creditors are still concerned about the conduct of an IP then we suggest that they seek specialist advice from either another insolvency practitioner or an insolvency lawyer. Advice can then be obtained about bringing a complaint against the IP to his professional body. It is worth noting at this point that IPs can be authorised to act by a number of professional bodies and not by one sole regulatory authority. We believe that a well-conceived and managed pre-pack administration can be a very good thing. Research that was carried out by an independent team led by Dr Sandra Frisby at Nottingham University reported that companies that used pre-packs saved over 90% of all jobs, whereas on other business sales to third parties only 60% or so of jobs was saved. With the best practice guidelines under SIP 16 and the rights against the administrator if they are not doing their job correctly it is clear that in the majority of cases pre-packs save time, money and jobs which has to be a good thing.

Furley Page are a leading Kent Solicitors who are able to offer legal services in a wide range of areas for both commerical and private clients, including French Property Law, Family Law, Business Debt Recovery and HR consulting.

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