New pre-pack code of practice for insolvency practitioners

A crackdown on insolvency regulations will come into effect from 1 January 2009 that will make it harder for some practitioners to quickly push through controversial sales of businesses in administration.

The new statement of insolvency practice 16 in England and Wales will make it mandatory that administrators disclose detailed information to creditors before and after a pre-packaged administration.

In a pre-pack, a company is typically put into administration and swiftly bought out of it by new owners with reduced liabilities, such as on unprofitable stores or retail stock. In a series of cases the courts have held that, where the circumstances of the case warrant it, an administrator has the power to sell assets without the prior approval of the creditors or the permission of the court.

However, this does not protect administrators from potential challenges to their conduct, or claims for misfeasance under the Insolvency Act 1986. As such, Most administrators would be very quick to counter accusations of selling businesses on the cheap to the detriment of creditors.

While the new guidelines have been developed over the past year, the timing of their introduction is significant because large numbers of high-street retail chains are expected to fall at the beginning of 2009.

The best practice code sets out a number of ways that the administrators should conduct themselves in a pre-pack sale situation.

The code says - "Practitioners should be clear about the nature and extent of their role and their relationship with the directors in the pre-appointment period. They should make it clear that their role is to advise the company and not to advise the directors on their personal position. This is particularly important if there is a possibility of the directors acquiring an interest in the assets in the pre-packaged sale."

It goes on to say that "Practitioners should bear in mind the duties and obligations which are owed to creditors in the pre-appointment period. They should be mindful of the potential liability which may attach to any person who is party to a decision that causes a company to incur credit and who knows that there is no good reason to believe it will be repaid.

Retailers, or in some cases just their stores, including the furniture chain ScS Upholstery, fashion retailer MK One and UCS, went through pre-pack administrations last year, although there is no suggestion that these deals did not adhere to best practice.

However, some deals - particularly those where existing management have bought a retailer out of administration - have left creditors, particularly in the property sector, out of pocket and seething with anger. Funnily enough Landlords are unsecured creditors and the code points out - "It is in the nature of a pre-packaged sale in an administration that unsecured creditors are not given the opportunity to consider the sale of the business or assets before it takes place. It is important, therefore, that they 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."

In all cases of a pre-packaged sale from 1 January 2009, the administrator will have to disclose to creditors information on the following

The source of the administrator's initial introduction

The extent of the administrator's involvement prior to appointment

Any marketing activities conducted by the company and/or the administrator

Any valuations obtained of the business or the underlying assets

The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes

Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration

Details of requests made to potential funders to fund working capital requirements

Whether efforts were made to consult with major creditors

The date of the transaction

Details of the assets involved and the nature of the transaction

The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration

If the sale is part of a wider transaction, a description of the other aspects of the transaction

The identity of the purchaser

Any connection between the purchaser and the directors, shareholders or secured creditors of the company

The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred

Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business

Any options, buy-back arrangements or similar conditions attached to the contract of sale including the source of their initial introduction and any connection between the purchaser and the directors, shareholders or secured creditors of the company.

Mike Jervis, a business recovery partner at PricewaterhouseCoopers, said "It codifies what has been best practice for a while".

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