Pre-pack administrations, where the business of an insolvent company is sold as soon as the administrators are appointed, often to the company's management or shareholders, are under scrutiny.

• The Business and Enterprise Select Committee (Chairman - Peter Luff MP) examined the issue when Stephen Speed, the head of the government's Insolvency Service, appeared to be questioned on 27 January (video here - see 38mins 50secs).
• BBC Radio 4's File on Four recently illustrated creditors' concerns about companies in the printing and retail industries where pre-packs had occurred (transcript here).
• BBC 2's Newsnight is shortly also to explore the sales of assets to failed companies' directors or their associates through pre-pack administrations.
• Press articles frequently refer to the effect of insolvencies on creditors and report surprise that businesses can be allowed apparently to continue after dumping creditors.

Two separate issues should not be confused.

Firstly, creditors suffer financial loss in an insolvency because the company has failed. The pain may feel worse if the management thought to be responsible for the loss appears somehow to benefit. But the fact remains that it is the company failure that causes the loss.

Secondly, insolvency procedures operate in the interests of creditors. Of course they must work properly to produce the best result, but that is why insolvency practitioners are highly trained, licensed, strictly regulated and, as officers of the courts, obliged to act properly. Insolvency is a complex process where a highly specialised area of law confronts commercial reality. Explanation is therefore crucial and the regulators emphasise transparency, for example in Statement of Insolvency Practice ("SIP") 16  "Pre-packaged Sales in Administrations", which came into effect for adminstrators appointed after 1 January 2009.

Until the recession, few people in business felt the need to think about insolvency, but understanding the insolvency process and its safeguards may help creditors appreciate that the procedures and the practitioners really do act in the interests of the creditors.

How can it be right that the directors appoint the administrator to sell the assets back to them?

The administrator acts for and has his remuneration fixed by the creditors. Of course he may have been introduced by the directors, but they have a legal obligation to call in an insolvency practitioner as soon as it becomes necessary.

Why were the assets sold so cheaply?

The administrator's job is to get the best result for the creditors (if the company can't be saved). One of his skills is selling distressed businesses and assets. Sometimes there may have been no obvious marketing, in which case the administrator will have commissioned an independent valuation and taken specialist professional advice to get the best deal.

At the time of the pre-pack sale (or shortly afterwards when they find out about it), creditors may not know enough about the precise circumstances to make a fully informed judgement, which is why the administrator is required by SIP 16 to explain the sale to creditors as soon as practicable. Ideally they should learn about it from the administrator immediately, with a full explanation so that even if not pleased about their losses, they are at least satisfied that the insolvency procedure is achieving the best recovery.

What if I'm not convinced it was the best deal?

Remember that it must be the best result for all creditors, including some who may have different interests; but, if you're not satisfied, engage in the process.

Talk to the administrator - if you know something he doesn't, he'll want to hear from you.

Raise your concerns at the creditors' meeting - other creditors may share your views or could have a different perspective.

To be involved in monitoring the administration and assisting the administrator to get the best result for creditors, get yourself elected onto the creditors' committee, but be aware that your duties there will be to act in the interests of all creditors rather than just yourself or an interest group.

It may be possible to nominate another insolvency practitioner to be liquidator once the administration ends, for an independent professional review of the administration. If not, and you still have concerns, you should consider seeking specific advice from an insolvency practitioner or insolvency lawyer on other remedies such as applying to court.

If you think the administrator has done something wrong you may want to complain to his regulator (the administrator has to tell you who that is - there are several), but that is more likely to lead to sanctions against the administrator than to things being put right in your particular case.

Why should the directors get away with it?

Buying a business from an administrator isn't itself a bad thing. But if you know of impropriety that went on before the administration, tell the administrator. He can then take any necessary action for the benefit of the creditors.

Are pre-packs a good thing?

Independent research into pre-packs by Dr Sandra Frisby of Nottingham University has established that in over 90% of pre-packs all the jobs in the business are saved, compared to only about 60% in other insolvency business sales.

There is no evidence that returns to unsecured creditors are better in pre-packs than in those administrations where the administrator secures funding to allow the company to continue to trade for a period while he markets and sells the business. Pre-packs can, however, reduce the risk of value destruction as a result of the insolvency process; they often realise more than simple liquidation; and they almost invariably cost less than a period of trading followed by a business sale.

The crucial point though is that in any particular case, the insolvency practitioner has to get the best result for the creditors as a whole. There is no evidence that this is not happening in the vast majority of cases. If the administrator has chosen to use a pre-pack it is because he believes that it is in the best interests of the creditors as a whole that he should do so.

Once the administrator has been appointed, the creditors' money has already been lost; and if the alternative is worse, using a pre-pack is undoubtedly a good thing.

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It depends on:

• how early you react to deal with the problem;
• whether any part of the business is able to continue as a going concern; and
• what workforce is required for that business (remembering that a purchaser may have some positions already covered).

The result can vary:

• no material change if insolvency can be averted quickly;
• some redundancies as part of an operational turnaround, again whilst avoiding formal insolvency; or
• if an insolvency procedure is necessary:
  • some or all of the workforce may be made redundant (leading to enhanced pre-insolvency claims);
  • pre-insolvency claims may receive anything between the modest state-guaranteed limits and full payment; and
  • wages and salaries for employment during insolvency should be paid in full.

This is a highly complex area of insolvency law and practice. Further background reading is available here from Business Link and here from The Insolvency Service.

There is no substitute for consulting a specialist, whose advice will be tailored to your specific circumstances. Most licensed insolvency practitioners, including those at Mercer & Hole, will consider the position with you at an initial meeting without charge.

 

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We reported in September 2007 (here) the consultation paper issued by the Insolvency Service setting out its proposals to modernise and streamline the law governing insolvency procedures.

You may recall the disenfranchising proposal requiring creditors to “opt in” if they wish to receive information on or to participate in the insolvency process.

The Insolvency Service now reports (here) that the consultation was completed in December 2007. Responses are being reviewed and necessary changes to primary legislation will be taken forward in late 2008, with a view to implementation on 1 October 2009.

Another modernisation project relates to the Insolvency Rules. The Insolvency Rules Committee is expected to complete its work on the revisions in late 2008 and the changes are planned to come into force on 1 October 2009.

Companies House expects revisions to the insolvency forms to require procedural changes, which will also be implemented by October 2009.

Further consultation is planned in relation to the Insolvent Partnerships Order and the Administration of Insolvent Estates of Deceased Persons Order and those and other insolvency related statutory instruments are also to be revised ready for implementation by 1 October 2009.

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As revealed in Insolvency reform - Bank Law Blog, the Insolvency Service has issued a consultation paper setting out its proposals to modernise and streamline the law governing insolvency procedure.

The broad aims are to bring insolvency law up to date with our current ability to communicate electronically, to move some decision-making process to insolvency practitioners and to remove some unnecessary burdens from insolvency practitioners. Replies to the consultation must be with the Insolvency Service by 10 December 2007.

The document's full title is:

"A consultation document on changes to the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 to be made by a Legislative Reform Order for the modernisation and streamlining of insolvency procedures".

It is:

 "A Consultation Paper issued by The Insolvency Service on behalf of the Minister of State for Employment Relations and Postal Affairs"

and it is available for download (from the Insolvency Service website) here.

There are eight proposals, detailed below:

1. To modernise and make more flexible the means of communication, and the exchange of information, between insolvency office-holders and creditors (and others who send or receive information) in insolvency cases by:

1.Introducing a provision requiring creditors to “opt-in” if they wish to receive information issued by the insolvency office-holder during the conduct of the proceedings and/or who wish to participate in the insolvency process.
2.Updating insolvency legislation to make it explicit that communication can be effected electronically where the legislation requires it to be “in writing”.
3.Enabling insolvency office-holders to provide information by sending a link to a website on which information is posted.
4.Providing a legislative framework that will allow insolvency office-holders to hold meetings required to be held as part of their conduct of insolvency cases through media other than meetings held at a physical venue.

2. To remove a requirement that is imposed upon liquidators and trustees in bankruptcy requiring them to obtain sanction for certain actions they propose to take as part of their conduct of the case.

3. Moving to allow discretionary advertising of the appointment of a voluntary liquidator and to remove restrictions on the form any such advertisement can take.

4. Removing a requirement imposed upon liquidators to summon annual meetings of members and/or creditors for the purpose of laying an account of their acts and dealings and of the conduct of the winding up during the preceding year.

5. Removing the requirement for any document in insolvency proceedings to be sworn by affidavit and to replace it with a less burdensome requirement for such documents to be verified by a statement of truth in accordance with the Civil Procedure Rules 1998.

6. To remove the requirement for an insolvency practitioner, acting as liquidator, to submit a report to the Secretary of State on the conduct of the directors of a company if he has already submitted such a report as administrator of the same company.

7. To remove a requirement that exists for the Insolvency Services Account (“ISA”) kept by the Secretary of State to be held with the Bank of England.

8. To remove the power of the court to order that a person owing monies to a company in liquidation pay those monies into an account, in the liquidator’s name, at the Bank of England.

As an IP, I have to say that on first reading the proposals make good sense.

Comment below, or respond directly to the Insolvency Service on Annex B of the document.

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