As the economy continues to falter, every day brings a new announcement of another high street name closing stores, announcing redundancies, being suggested as being at risk of going under or declaring that it has gone into administration.
With the increased regularity of insolvencies and administration, and with seemingly no end in sight, the Government has implemented what has been called a "crack-down" on so-called pre-packaged sales of companies in administration.
A pre-packaged deal is used often in circumstances where a struggling company is placed into administration and then its assets are immediately bought back by its previous directors/shareholders, who then continue to run the business. They are often used where the nature of the company's business means that the administrator must act quickly or risk that there is no business left to sell, as customers move to alternative suppliers. Recent high-profile examples of pre-pack deals include tea and coffee chain Whittard of Chelsea and high street clothes outlets USC and The Officers Club.
Pre-pack deals have been criticised in some quarters for a lack of transparency and fairness, particularly from creditors who may lose money due to them from the failed company, and then see the business, or part of it, continue unencumbered by the pre-existing debts.
From 1st January 2009, new rules (contained in Statement of Insolvency Practice 16) now require that administrators acting in a pre-packaged sale from administration must:-
- Always perform their role in the interests of the company's creditors as a whole;
- Make it clear to the directors that they are instructed to advise the company, not to advise the directors in their personal capacity, and encourage them to take independent advice; and
- Disclose to creditors specified information, including, but not
limited to:-
- the source of the administrator's initial introduction;
- the extent of the administrator's involvement prior to their appointment;
- any valuations obtained of the business or its underlying assets;
- any alternative courses of action considered; and
- details of the assets and nature of the sale, including the consideration, identity of the purchaser, and any connection between the purchaser and the company's directors, shareholders and secured creditors.
The Insolvency Service has stated in issuing the new rules that whilst pre-packs can be the right course of action in many circumstances, potentially improving returns for creditors as well as preserving the business of the failed company and saving jobs, they will be clamping down on "any directors who misuse the administration process to disadvantage creditors or seek to gain benefit for themselves".
Of particular concern for directors is the potential for personal liability for their actions prior to administration for decisions which cause the company to incur credit when the decision is made in the knowledge that it is unlikely that the debt will be repaid. Directors of insolvent companies can potentially be banned from holding any directorships for between 2 and 15 years if it is found that their conduct in the period leading up to insolvency was inappropriate.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
