Pre-pack code of practice

A crackdown on insolvency regulations came into effect from 1 January 2009 that makes it harder for some insolvency practitioners to rush through controversial sales of businesses in administration.

The new Statement of Insolvency Practice 1 6("SIP 16") in England and Wales makes it mandatory that administrators disclose detailed information to major creditors before completion of the sale and to all creditors after a pre-pack sale of the business and assets.

In a pre-pack, a company is typically put into administration and the sale of the business is completed immediately with the phoenix company acquiring a business with significantly reduced liabilities.

Some pre-packs, particularly those where existing management have bought the out of administration, have left creditors out of pocket and seething with anger as  they have not had any say in the transaction.

In all cases of a pre-packaged sale the administrator will have to adhere to SIP 16 and disclose to all creditors a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests.

In 2010 the coalition government issued notice of its proposals that all creditors should be given three days’ notice of a pre-pack sale, allowing the creditors’ time to challenge the sale.  After 18 months consultation the proposal was scrapped in January 2012 after lobbying by numerous bodies as it was believed that the notification to creditors would strangle any business restructuring to the detriment of the employees and the creditors.

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