UK: Technical Update: Re-Packed Pre-Packs?

Last Updated: 26 January 2015
Article by Jason Freedman and Jessica Lorimer

Pre-packs are undoubtedly controversial and arguably misunderstood by the general public owing to issues of transparency and perceived sales of businesses at an undervalue (often to the management of 'oldco'). As a result, the Government released an independent review of pre-packaged sales in administrations in June last year.

The review highlights the positive aspects of pre-packaged sales, the areas which require some improvement and suggestions for insolvency practitioners to improve the pre-pack image, some of which are set out below. At this stage, they remain recommendations only.

PRACTICAL SUGGESTIONS FOR INSOLVENCY PRACTITIONERS

  • Pre-pack pools: connected parties voluntarily meet with a pool of unsecured creditors to provide details of the proposed sale in advance and to invite opinions. A negative opinion would not prevent the sale but would be marked in the SIP16 statement. The aim of this would be to disclose details of the deal (and avoid criticisms of lack of transparency) but without breaking the news of the pending administration to the general public in such a way to damage the company's business.
  • Viability reviews: connected purchasers voluntarily prepare and provide to unsecured creditors a 'viability review' of the purchasing company setting out how the business will be conducted differently from the insolvent company.
  • Marketing principles: marketing of the business should comply with the six principles of good marketing (in short, these include promoting the business using independent marketing campaigns and appropriate methods) and any deviation from these should be noted in the SIP16 report.
  • Valuations: these should be carried out by valuers holding professional indemnity insurance and, where such valuers are not used, the insolvency practitioner should state the reason for this in the SIP16 report.

TIME'S ALMOST UP FOR INSOLVENCY CFAS

IIn 2012 Lord Justice Jackson proposed a number of reforms to the way civil litigation was funded.  Pursuant to those reforms success fees under Conditional Fee Agreements (or CFAs) can now no longer be recovered from the other side and Damages Based Agreements (or DBAs) were introduced.  As regards the inability to recover success fees from the other side, an exception was provided for in insolvency cases.  This exception granted until April 2015, in order to allow the profession to consider alternative funding mechanisms.

Notwithstanding this, the view of many in the profession is that there are no viable alternatives to the current CFA regime. In insolvency cases, there are often no funds to commence litigation against, for example, a misfeasant director, and the only commercially viable way to incentivise the insolvency practitioner and his legal advisors to bring action in the absence of funds is on a CFA basis.

It is estimated by The Association of Business Recovery Professionals (R3) that CFA-backed insolvency litigation realises an estimated £150-£160m per annum. It is unclear what percentage of these realisations will be possible under DBAs.

Accordingly, many in the insolvency profession (including the Charles Russell Speechlys Corporate Restructuring and Insolvency team and R3), have contacted the Ministry of Justice to express their views on this. Despite this, the Ministry of Justice has confirmed to us in writing that it is the Government's position that the reforms to CFAs should apply to all areas of civil litigation, including insolvency proceedings.

Accordingly, from April 2015 it will not be possible to enter into new CFAs in insolvency proceedings.

NEW INSOLVENCY RULES

After almost 30 years of working with the Insolvency Rules 1986 (updated over time by 23 statutory instruments), these will shortly be replaced in their entirety by the Insolvency Rules 2015.

Although not yet in final form, a working draft of the 2015 rules has been released. Some key changes are set out below.

GENERAL AMENDMENTS:

Re-ordering: the 2015 rules will be in a substantially different order to the 1986 rules. Part I of the rules will set out defined terms (to be used throughout the rules), give details of the calculation of time limits and detail the content, service and accessibility of court documents. Parts 14 to 20 of the 2015 rules will set out provisions which are applicable to all insolvency procedures including: claims and distributions to creditors, creditors' committees, decisions by creditors, progress reports and remuneration.

Decision making: the 2015 rules will replace the need to call creditors' meetings in some cases with a requirement to communicate with creditors by way of correspondence as the default method. In addition, where creditor consent is required, it will be deemed to have been given unless 10% or more (in value or number) object in writing.

Abolishment of final creditors' meetings in liquidation and bankruptcy cases: the office-holder will no longer be required to call a final meeting of creditors before bringing the process to an end. However, in all insolvency procedures, the office-holder will be required to send final reports to creditors together with a notice of intention to vacate office, at least 8 weeks prior to his or her exit from office.

Composition of creditors' and liquidation committees: contributories will no longer be able to form part of a creditors' committee in creditors' voluntary and compulsory liquidations (on the basis that it is unlikely that a contributory will have any financial interest in these liquidations).

Opting out: creditors can choose to opt-out of correspondence from the office-holder, save in cases where a dividend is being proposed.

Resignation of liquidator or trustee: the resignation of a liquidator or trustee will come into effect on the date on which notice is given to their prescribed body. The purpose of the creditors' meeting will be for the creditors to consider the appointment of a replacement office-holder rather than to accept an office-holder's resignation.

ADMINISTRATIONS

Notifying a company of a notice to appoint or notice of intention to appoint an administrator: in an effort to clarify the position following conflicting case law, the 2015 rules make clear that a company need only be notified of a notice of appointment or notice of intention to appoint where the proposed appointment is by a qualifying floating chargeholder.

Prior professional relationship: the requirement for proposed administrators to disclose any prior professional relationship with the company will be removed.

LIQUIDATIONS

Personal service of winding up petitions: the new rules provide for a new requirement to personally serve a winding up petition. Such service is to take place within 3 days of the petition being presented.

BANKRUPTCY

Debtors' bankruptcy petitions: where the procedural requirements on a debtor's bankruptcy petition have been met, a bankruptcy order will be made and the court will no longer retain any discretion in this regard (although will be permitted to request further documentation where appropriate).

Service of statutory demands: statutory demands must be served personally unless otherwise directed by the court.

A final draft of the Insolvency Rules 2015 is awaited from the Insolvency Service. In the meantime, the current working draft can be located here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jessica Lorimer
 
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