X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

The UK’s pre-pack process has come in for much criticism – but is it really that bad?

The current financial storm may well be the gravest worldwide recession ever seen. High-profile administrations have catapulted the UK’s insolvency processes into the spotlight, with the reforms introduced by the Enterprise Act in 2003 facing intense public scrutiny.

Allegations abound that our processes are ‘not fit for purpose’ with others lamenting our lack of a Chapter 11-style rescue process. Worse still, dishonest directors are said to be gleefully ditching companies (and their associated debts) and selling assets to their latest shell company. Cries of ‘revolving door’ administrations and how ‘debt dodgers revel in return of the phoenix’ circulate in the press.

Background

Administrators must provide a statement of proposals to creditors within 10 weeks of appointment. This sets out what they propose to do with the company and its assets. However; in a pre-pack administration, the business and assets are sold in advance. At the meeting the sale is presented to the creditors as a fait accompli.

Sales prior to the first meeting are not new – the practice was around before the 2003 reforms. So long as they considered it to be in the best interests of the company and its creditors, administrators could take immediate steps to sell assets – before the meeting and without reference to the court. The practice was affirmed more recently by decisions in Transbus and DKLL Solicitors.

The pre-pack process

Waiting until the first creditors’ meeting before looking to dispose of the business may not be practical: the company might lose both customers and employees over the intervening period. Goodwill – and therefore value – will suffer.

A pre-pack sale aims to dispose of a business smoothly, keeping employees in place and preserving value. Generally, an insolvency practitioner will work with directors prior to the administration. The business and assets will be valued and marketed. Commonly this is undertaken in secrecy with a view to a quick sale on or soon after appointment. The result: jobs are saved and there is a better return for the company’s creditors.

Yet the perceived lack of transparency and the ‘done deal’ approach leaves unsecured creditors feeling disenfranchised. Was the business marketed correctly? Was the best price really achieved?

Statement of Insolvency Practice (SIP) 16

SIP 16 is a statement of best practice for licensed insolvency practitioners (IPs). Released on 1 January, 2009, it sets out basic principles and standards of behaviour. Failure to comply may lead to disciplinary action.

The SIP focuses on transparency and disclosure: IPs must maintain records so they can demonstrate that they have considered duties and obligations owed to creditors in the pre-appointment period as well as explain and justify why a pre-packaged sale was undertaken. Detailed information must be disclosed, including:

This premium content is reserved for
Legal Week Subscribers.
Subscribe today and get 10% off.

A PREMIUM SUBSCRIPTION PROVIDES:

  • Trusted insight, news and analysis from the UK and across the globe
  • Connections to senior business lawyers within the leading law firms and legal departments
  • Unique access to ALM's unrivalled, market-leading reporting in the US and Asia and cutting-edge research, including Legal Week's UK Top 50 and Global 100 rankings
  • The Legal Week Daily News Alert, Editor's Highlights, and Breaking News digital newsletters and more, plus a choice of over 70 ALM newsletters
  • Optimized access on all of your devices: desktop, tablet and mobile
  • Complete access to the site's full archive of more than 56,000 articles

Already have an account?

For enterprise-wide or corporate enquiries, please contact Paul Reeves on Preeves@alm.com or call on +44 (0) 203 875 0651

 

Legal Week Newsletters & Alerts

Sign Up Today and Never Miss Another Story.

As part of your subscription, you can sign up for an unlimited number of a wide range of complimentary newsletters and alerts. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2018 ALM Media Properties, LLC. All Rights Reserved.