Pre Pack Administrations & The Proposed New Insolvency Rules

To explain what a Pre Pack Administration of an insolvent company actually is it is probably best to first explain the meaning of the word "Administration". New Insolvency Rules regarding pre pack administrations are expected to be enacted before the end of 2011.

An Administration is an insolvency process. It can be used by your limited company to freeze creditors enforcement actions and to create a breathing space to enable you to have time to restructure your company's affairs.

The words "Pre Pack" only means "pre packaged".    It is a process where planning has been done before the appointment of an administrator. In that planning period an Agreement is drawn up that sets out exactly what will happen immediately or shortly after the Administrator is appointed.  Historically, what would happen is that the business would be sold, without reference to creditors, under the terms of the prepack sale agreement. 

For example such an Agreement might have as its main terms:

• Either that the underlying business will be be sold to a new company owned by the directors for a set price. Such a sale relieves the new phoenix company of the debts of the original company. 

• Or, that the underlying business is sold to management by way of a management buyout.

• Or that the underlying business is sold to a third party or third party organisation.

• Or, that some parts of the underlying business are closed and the remaining parts are sold to a number of parties.

In other words the administrator sells the business before the creditors have an opportunity to say whether or not they approve of the sale transaction. It is this aspect that has brought some pre packaged sales into disrepute.

"Pre Packs" as they are called are not subject to many rules in The Insolvency Act 1986. Insolvency practitioners do however have to follow the detailed rules set out in a regulatory document called Statement of Insolvency Practice Number 16 (SIP 16) before implementing the process.

That SIP 16 Statement ensures that the Administrator is transparent about the transactions that have taken place under the agreement. The administrator has to immediately circulate all of the creditors immediately following the sale with specified details regarding the sale.

It is apparent that this insolvency tool is very helpful if your company is overloaded with debt as the process permits an organised and pre-planned restructure of your company's affairs. The process often involves the shedding of substantial amounts of debt.

The sale of the business under the pre-pack is completed immediately or shortly after the administrator's appointment and as a result there is no disruption to trading in this type of administration.

Pre-pack Administration sales are recognised in the insolvency profession as being an effective and speedy means of rescue however they have always been particularly unpopular with creditors, as historically they have often had no say in the matter and are informed of the sale, only after it has happened. 

Creditors would often feel particularly aggrieved if the pre-pack sale was to a new limited company that had been incorporated by the directors of the insolvent company! 

As has been mentioned previously, Statement of Insolvency Practice No 16 ("SIP 16") was introduced with a view to providing creditors with as much information as possible in connection to the sale.  The information that must be provided to creditors is extensive and the Administrator must be able to explain and justify why a pre–packaged sale was considered appropriate.  Creditors are furnished with a comprehensive report in that regard with the first notification of the Administrators appointment but despite being provided with a full and detailed account of the transaction, creditors are still, more often than not, first learning of the sale, after it has been concluded.

Proposed Pre-Pack Reforms

On 31 March 2011 Edward Davey, Minister for Employment Relations, Consumers and Postal Affairs; Department for Business, Innovation and Skills, proposed that the procedure for pre-packaged Administration sales be reformed in order to ‘improve transparency and confidence in pre-packaged sales’.

The intention is that creditors have an opportunity to voice any concerns and to ensure that pre-packaged Administration sales are entered into “fairly and reasonably.”

It is intended that Administrators now be required to give notice to creditors where they propose to sell a significant proportion of a company’s assets or its business to a connected party, in circumstances where there has been no open marketing.

By giving creditors notice of the proposed sale it should enable them to express any particular concerns, or indeed make a higher offer for the assets and the Administrator would need to give proper consideration to any issues raised.

The recommended notification period for creditors is currently understood to be just three days, which may lead creditors to question as to whether the proposed reforms really go far enough to improve their position in circumstances where a pre-packaged Administration sale is envisaged.

The pre-pack administration rule  reforms have yet to be brought into practice and it may well be the case that the current propositions will undergo several revisions before becoming regulation - so watch this space!