Pre-Packs – a solution in troubled times?

The term “pre-pack” is used, in the context of an administration under the Insolvency ActPre Pack Pic 1986, to describe the process through which a company is put into administration and its assets are immediately sold under a sale which was arranged before the administrator was appointed. The practice is not new, but has become increasingly popular since the financial crisis in 2008. Approximately 25% of all administrations in 2011 (the last year for which figures have been published) were pre-packs and nearly 80 per cent of those pre-pack sales were to connected parties.

Pre-pack administrations have been the subject of much debate in both the legal and political spheres. Opponents accuse pre-packs of being clandestine in nature, lacking transparency, prejudicial to unsecured creditors, and synonymous to the outlawed practice of phoenix trading (where the activities of a failed company would be continued by the directors using the vehicle of a new company under the same or similar name).

Supporters argue that pre-packing is a fast and cost effective method of administration which promotes the preservation of employees and the company’s existing goodwill. Pre-packing also avoids (at least for the time being) the stigma associated with a lengthy administration or liquidation often seen in the business world.

Back in 2009 the Insolvency Service took steps to increase transparency by issuing regulatory guidance for Insolvency Practitioners involved in pre-packs (SIP 16) which set out the information that must be provided to creditors after a pre-pack sale. Opponents continued to raise concerns and in 2011 the Government proposed legislation to control the use of pre-packs, however it reversed its position in 2012 and announced that it preferred a review of the existing regime over new legislation.

The Government’s position appears to align with that of the Courts in that pre-packing should be used to maximum extent possible. Pre-packing has been endorsed by the Courts even where the main creditor was in opposition to the sale, and in a separate case the Court held that failing to comply with SIP 16 in relation to a pre-pack was not of itself a ground to remove an administrator.

The issue has recently re-surfaced after a report by the Department for Business, Innovation and Skills select committee (Feb 2013) criticised the secretive nature and lack of transparency of the whole pre-pack procedure, and this has prompted the Government to launch an independent review into pre-packs.

With more and more businesses entering into financial difficulty and potential purchasers seeking to take advantage of the pre-pack procedure we expect the issue to continue to divide opinion from all sides. We will update again when the result of the Government’s review is published.

PLEASE NOTE: this briefing note contains information about current legal issues and is only intended as a general statement of the law – it does not give legal advice. No action should be taken in reliance on this note without specific legal advice.

For further information please contact:

benBen Manners
Partner, Corporate
Telephone: +44 20 7845 7453