People Get Ready…Pre Packing Pre-packs

Published: 15th April 2009

Pre-packaged administrations may often be the most viable option to save jobs and to sell the business carried on by the company as a going concern.

Since the consent of the troubled company's creditors is not necessary for a pre-pack, they are not without controversy, particularly when the business and assets are sold to a phoenix company owned by the same owners of the failing company.

The Insolvency Service estimate that in 2009 there will be at least 100 pre-packs per month, all of which will no doubt see creditors out of pocket to a degree and some of which may result in angry creditors seeking somebody to blame.

These numbers may be expected to rise as the recession tightens its grip. Ironically, with some early signs of credit availability slowly re-appearing, creditors who have held off placing a business into administration (given the absence of funding for buyers) may decide they can now press ahead and achieve a sale and some return.

To provide a measure of comfort to creditors the Joint Insolvency Committee (a supervising board made up of the institutions which regulate the various insolvency professionals) has issued guidance on the steps which ought to be taken when a pre-pack is being considered. All insolvency practitioners will be aware of their duties as set out in Statement of Insolvency Practice 16 which was introduced on 1 January 2009.

SIP 16 states that IPs should be clear in the pre-appointment period about the nature and extent of their role and their relationship with the directors and the obligations which are owed to creditors. IPs have duties to disclose a wide range of information to creditors about the pre-pack, including:

The source of the administrator's initial introduction;
The extent of the administrator's involvement prior to appointment;
Any marketing activities conducted; and
Why it was not felt appropriate to trade the business, and offer it for sale as a going concern, during the administration.

Practical steps to compliance with SIP 16 by IPs may include:

Ensuring that up to date and independent written valuations of assets are carried out;
Consulting with funders and other major creditors to canvass their opinions;
Identifying all of the options for creditors and recording reasons for the decision that a pre-pack was considered the best option;
Keeping evidence of prior efforts to market the business for sale and/or recording their reasons for deciding not to market it for sale.

These duties aim to increase the transparency in pre-packaged administrations for the benefit of creditors. Arguably, these duties simply codify what is already regarded as best practice.

Those involved in a pre-pack whether as administrators or buyers or their advisors and those affected by it such as unsecured creditors need to be aware of these duties and how compliance is verified so that they can be confident of the legitimacy of the pre-pack - or challenge it if they feel aggrieved.

If you would like to discuss any of the issues raised in this update please contact:

Corporate Recovery and Insolvency Department
Dominic Vincent on 0161 214 0503

Corporate Department
Paul Raftery on 0161 214 0528

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