Pre-Packed Business Sales

New pre-pack code of practice

New pre-pack code of practice for insolvency practitioners
A crackdown on insolvency regulations came into effect from 1 January 2009 that makes it harder for some practitioners to quickly push through controversial sales of businesses in administration.

The new statement of insolvency practice 16 in England and Wales makes it mandatory that administrators disclose detailed information to creditors before and after a pre-packaged administration.

In a pre-pack, a company is typically put into administration and swiftly bought out of it by new owners with reduced liabilities.  In a series of cases the courts have held that, where the circumstances of the case warrant it, an administrator has the power to sell assets without the prior approval of the creditors or the permission of the court.

However, this does not protect administrators from potential challenges to their conduct, or claims for misfeasance under the Insolvency Act 1986. As such, most administrators would be very quick to counter accusations of selling businesses on the cheap to the detriment of creditors.

While the new guidelines have been developed over the past year, the timing of their introduction is significant because large numbers of high-street retail chains are expected to fall at the beginning of 2009.

The best practice code sets out a number of ways that the administrators should conduct themselves in a pre-pack sale situation.

The code says - "Practitioners should be clear about the nature and extent of their role and their relationship with the directors in the pre-appointment period. They should make it clear that their role is to advise the company and not to advise the directors on their personal position. This is particularly important if there is a possibility of the directors acquiring an interest in the assets in the prepackaged sale."

It goes on to say that "Practitioners should bear in mind the duties and obligations which are owed to creditors in the pre-appointment period. They should be mindful of the potential liability which may attach to any person who is party to a decision that causes a company to incur credit and who knows that there is no good reason to believe it will be repaid.

Retailers, or in some cases just their stores, including the furniture chain ScS Upholstery, fashion retailer MK One and UCS, went through pre-pack administrations last year, although there is no suggestion that these deals did not adhere to best practice. However, some deals - particularly those where existing management have bought a retailer out of administration - have left creditors, particularly in the property sector, out of pocket and seething with anger.

Funnily enough Landlords are unsecured creditors and the code points out - "It is in the nature of a pre-packaged sale in an administration that unsecured creditors are not given the opportunity to consider the sale of the business or assets before it takes place. It is important, therefore, that they are provided with 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 all cases of a pre-packaged sale from 1 January 2009, the administrator will have to disclose to creditors information on the following