The Government’s Insolvency Service says:

“We maintain the view that in the right circumstances pre-packs can be a useful tool”.

This echoes our previous commentary on pre-packs noting that insolvency procedures operate in interests of creditors, and that creditors lose not because of the insolvency mechanism used, but because the company failed in the first place.

At a recent R3 Breakfast Briefing to insolvency practitioners, Mike Chapman, the Head of Insolvency Practitioner Regulation at The Insolvency Service, confirmed that the Service has been tackling ignorance about the position of unsecured creditors in insolvency legislation generally, but he added that it was difficult to engage effectively with creditors and that he would welcome suggestions about how best this might be achieved.

The focus of the briefing was Statement of Insolvency Practice 16 (“SIP16”), which requires administrators to report fully to creditors immediately on the execution of a pre-pack sale.

The Insolvency Service position is very clear on the SIP16 requirements being principles based:

“It is important that [creditors] 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.”

A checklist approach to covering all the points mentioned in SIP16 may be found to be non-compliant if it is not clear to creditors why the pre-packaged sale was undertaken.

That is, of course, the point. Transparency means enabling creditors to understand why a particular course was followed and it is transparency that will enable creditors to have confidence in insolvency practitioners’ activities on their behalf.

Chris Laughton is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Chris you can call him on 020 7353 1597.

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Stitching up creditors; insolvency practitioners earning huge fees; rescuing businesses; clearing up a mess: these are examples of what insolvency means to people.

You may have thoughts of your own (please comment below), but some of my observations are:

• Directors or debtors don’t usually cause loss to creditors on purpose, although creditors often lose and directors/debtors can certainly be at fault.
• Insolvency practitioners are highly trained, qualified, skilled and regulated specialists, who are paid the same as other specialist accountants and lawyers. Their fees are approved by creditors.
• Most troubled businesses can be rescued if good advice and remedial action are taken soon enough. If left too late, that remedy may involve insolvency proceedings where creditors are not paid in full.
• There are always losers in a formal insolvency, which is why action should be taken early enough to avoid it. When that doesn’t happen, problems turn into a mess and people lose – sometimes a lot.

The theme is that whether you’re a creditor or a debtor it pays to seek advice early – from someone who really knows what they’re talking about.

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Directors' duties

Directors' duties can be onerous at the best of times. The general duties have been codified in the Companies Act 2006 and are summarised simply in the following Ministerial statement:

1. Act in the company’s best interests taking everything you think relevant into account.
2. Obey the company’s constitution and decisions taken under it.
3. Be honest and remember that the company’s property belongs to it and not to you or its shareholders.
4. Be diligent, careful and well informed about the company’s affairs. If you have any special skills or experience use them.
5. Make sure the company keeps records of your decisions.
6. Remember that you remain responsible for the work you give to others.
7. Avoid situations where your interests conflict with those of the company. When in doubt disclose potential conflicts quickly.
8. Seek external advice where necessary, particularly if the company is in financial difficulty.

Troubled companies

But things get more difficult if the company has financial problems.

Directors must recognise that when a company’s assets exceed its liabilities or it cannot pay its debts as they fall due, their primary duty ceases to be to the shareholders and the interests of creditors become paramount.

Failure to carry out his duties with the appropriate degree of skill and care may render a director liable for wrongful trading if he knew or ought to have known that the company could not avoid insolvent liquidation. The guilty director may then be liable to compensate creditors for the losses caused by his conduct. He may also be disqualified from acting as a director for up to 15 years. 

Practical steps

What can you do as a director to protect yourself when your company is in financial difficulties?

1. Hold regular full board meetings and keep comprehensive minutes of commercial decisions and the reasons for them - indeed, keep notes of all significant discussions about the company's affairs.
2. Make sure that you have full financial information and are aware of the extent of creditor pressure, court or recovery action by creditors and disputes.
3. Make sure that the decisions you take are taken in the interests of creditors.
4. Seek specialist advice. You are not expected to know all the answers about how to deal with financial distress.
5. If you know or suspect that there is no reasonable prospect of the company avoiding insolvent liquidation, discuss the situation at a full board meeting with a view to taking specialist advice and initiating a formal insolvency procedure.
6. Take independent advice if fellow directors do not share your concerns about the company’s solvency.
7. Do not take further credit.
8. Take steps to minimise losses to all creditors equally.

Points 7 and 8 can be particularly challenging in the real world and will be much easier to deal with if you have the benefit of specialist insolvency advice.

Seek advice early as this not only protects you as a director, it widens the options for rescue and turnaround action.

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