Pre-pack administrations may offer the best outcome for unsecured creditors
Question
I am a trade creditor of a company with several retail outlets (Old Co) that went into administration two weeks ago. The administrator has informed me that Old Co’s business and assets have been sold to another company (New Co) that has the same directors and shareholders. I have noticed this is happening more and more frequently from talking to other creditors and reading the papers. Is there any action available to me and can i pursue the new company for my debt?
Answer
Assuming that you are an unsecured creditor, the administrator’s actions may be legal, although you are entitled to be provided with information to enable you to establish the position. You do not have a claim against New Co, and Old Co may not have sufficient sums realised from the sale of the assets with which to settle your claim.
Old Co is subject to a pre-pack administration. This means that it has been put into administration and its business and assets have been sold under a sale that was arranged before the administrator was appointed. This procedure is becoming increasingly common.
A pre-pack sale provides for a quick transfer of the business. It can minimise loss of confidence on the part of suppliers, customers and employees and save more jobs than a normal administration.
However, such arrangements are perceived as lacking transparency.
Since the Insolvency Act 1986 nor Enterprise Act 2002 do not expressly provide for pre-packs, administrators do not have to obtain prior approval for such sales from the court and creditors.
As an unsecured creditor, you would not have received prior warning of the sale and were unable to consider the proposal. Secured creditors would have been consulted because they would need to release their security to enable the sale to proceed. The limited marketing associated with a pre-pack sale may (wrongly) give the impression that the interests of unsecured creditors have been disregarded. The process also resembles asset-stripping, particularly where the business and its assets are sold to the original owners.
You should request information from the administrator under the Insolvency Service’s Statement of Insolvency Practice 16 (SIP 16). Under this, administrators have to explain to creditors the background to their appointment and why a pre-pack offered the best outcome.
An administrator must also disclose
- the identity of the buyer of the business or assets
- any valuation of the business or underlying assets;
- which alternative courses of action were considered;
- the consideration for the sale or the terms of payments; and
- any connection between the buyer and the directors, former directors, shareholders or secured creditors.
Creditors have a statutory right to bring an action against an administrator under sections 74 and 75 of Schedule B1 to the 1986 Act if the administrator has unfairly harmed a creditor’s interests, is not performing his functions quickly and efficiently or in the case of misfeasance. However, the only case to date in respect of SIP 16 determined that a failure to comply would not of itself be sufficient to remove an administrator from office Clydesdale Financial Services Ltd v Smailes [2009]
Where a pre-pack is subject to judicial scrutiny, the court must consider the merits of the proposal. Information must be provided to enable it to decide whether it is in the best interests of the creditors as a whole Kayley Vending Ltd [2009]
In DKLL Solicitors v Revenue & Customs Commissioners [2007] , the court approved a pre-pack sale despite objections from the majority creditor, because it would save jobs and minimise disruption to clients.
In Re Hellas Telecommunications (Luxembourg) II SCA [2009] the court, for the first time, supported a pre-pack sale: the judge ruled that the company was clearly insolvent and there was no realistic alternative. This case concerned an investment company, but the courts may take a different approach for an operational trading company.
Potential for reform
A consideration of these authorities and further investigation may reveal a cause of action or at least satisfy you that the correct procedures have been followed. However, would your position be different but for the pre-pack sale? In the absence of any misconduct by the administrator or the directors of Old Co, if the only alternative to the pre-pack sale is a sale at a lesser value or the company’s liquidation, you would in any event have been unlikely to recover the sums due to you so your position has not been prejudiced.
Pre-pack administrations were the subject of a consultation published by the Insolvency Service in March 2010. It invited feedback on proposals for reform, including giving SIP 16 statutory force; requiring all pre-pack administrations sales to exit into compulsory liquidation to enable the conduct of the directors and the administrator to be reviewed; and to subject all pre-pack sales to the prior approval of the court or the creditors. As yet, no proposals for reform have been formulated.