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News 29.5.13

The Economia: The future of pre-packs; 29 May 2013

News 29.05.2013

A new independent review of pre-pack administrations has been announced but not yet launched. Given that there have been a number of reviews on pre-packs in recent years – can we expect this most recent review to deliver any new conclusions? CBW Partner, Carl Bowles, explains. The “pre-pack” sale is an agreement for the sale of an insolvent company’s business and assets which is put in place before the company goes into a formal insolvency process, usually administration. The process has been held by the courts to be legal and the courts involvement will be minimal unless there has been a misfeasance. The process is regulated by Statement of Insolvency Practice (SIP) 16 (and SIP 13 for connected party sales in Liquidation). This requires any such sale to be fully justified – to be in the best interest of creditors as a whole – by an administrator, in a report to creditors explaining his actions within 14 days of his appointment. The SIP 16 reports are reviewed independently by the Insolvency Service, an executive agency of the department for Business Innovation and Skills. Lee Manning, as president of R3, said in a recent article for the Law Society Gazette that the service’s own reports on SIP 16 have not identified any evidence that there are different levels of director misconduct in a pre-pack compared with any other corporate failure. Similarly, a sale back to existing management is not in itself indicative of misconduct or malpractice. One must also remember that serious breaches in compliance are rare with SIP 16 reports. Last year, just 4% of SIP 16 reports were referred to the regulatory bodies, and less than half of these led to action. Back in 2010 the government reviewed pre-packs and the Insolvency (Amendment) (No. 2) Rules 2011 were proposed as the “solution”. This required administrators, once in office, to give three days’ notice to creditors when proposing to sell a significant proportion of a company’s assets or business, which has not been exposed to the market, to a connected party. However, there were a number of problems with this proposal. The proposed notice, in addition to the company’s particulars would include: the sale price, the nature of the connection to the purchaser and the independent valuations. Notwithstanding the serious commercial concerns with disclosing valuations to a purchaser before completion, what in fact could a creditor do with this notice? Presumably seek injunctive relief. Could a spurious objection delay the sale and jeopardise any value in the business? How will requests for lengthy due diligence, which may or may not result in a better offer, be dealt with? The proposed rule change was withdrawn and one would not anticipate the return of the three-day rule. However, in order to address the perceived problems with pre-packs, a procedure involving a third party liquidator could be on the cards. The proposal could be that all connected party pre-pack sales must exit administration to liquidation. Indeed this could apply to all connected party administrator sales whether pre-pack or not; given this is what really appears to aggravate unsecured creditors. If a private sector liquidator is to act, he will need to get paid, and one would expect a ring fenced amount retained out of the sale proceeds in order to meet costs. But many pre-pack administrations are on a small scale and there would simply not be the available funds to pay for two sets of insolvency practitioners (IP’s). Indeed, in many of these smaller administrations the IP is already suffering a significant write off of time costs. The expected result, which does not sit with the “rescue culture”, will be to put many smaller companies into liquidation. A sensible conclusion for the review would be to recommend that all connected party sales are to exit administration to compulsory liquidation. The Official Receiver will act as liquidator and review the actions of the administrator. This would be one logical step up from the current role of reviewing the SIP 16 reports. However the government must bite the bullet and give the Insolvency Service adequate funding – which it does not currently appear to have. Read the article  in Economia here