The UK has recently experienced an increase in the number of pre-packaged sales of companies in administration. This is partly due to a greater number of companies facing insolvency and administration during this economic downturn. Therefore, from 1 January 2009 the Joint Insolvency Committee has implemented a new Statement of Insolvency Practice 16 (SIP 16). This is intended to harmonise and maintain the standards of administrators when dealing with pre-packaged administration.

Pre-packaged Administration

Pre-packaged administration is a sale of an insolvent company's assets, which is pre-arranged before the company goes into a formal insolvency process. The purchaser is lined up and the terms of the sale are agreed in advance. The sale then will take place immediately following the appointment of an administrator, who will execute the necessary documents. Pre-packs often involve the sale of the business to the existing owners or management.

Pre-packs are often used where the nature of the business is such that swift action is required to maintain the value of the business. A prompt sale of the business enables continuity of supply for customers and any negative publicity is minimalised or avoided, which could potentially destroy the value of a business. There is clear evidence that pre-packs are better at preserving employment than business sales. Pre-packs are also used when the business is marketed before the insolvency proceedings, or where there is likely to be a lack of available funds to keep trading while the administrator finds a potential buyer during insolvency proceedings.

The main criticism of pre-packs is that they lack transparency and fairness. Due to the speed of the sale some creditors feel that the business is sold at an undervalue or that the goodwill of business has not been fully evaluated. Marketing of the business may not be visible as it takes place before any formal insolvency proceedings have commenced. Creditors are not given an opportunity to consider the sale, or may not even be aware of its existence until after the sale is concluded. Where the existing managers or owners have acquired the business there is sometimes a perception that they have effectively bought back the debt-free business and are continuing to trade as before, albeit under a new name.

Statement of Insolvency Practice 16

SIP 16 introduces new requirements of disclosure when dealing with a pre-packaged sale. It could be argued that it is just enforcing what was previously considered 'best practice'. It directs the administrators to their duty to act in the interests of creditors as a whole, and not the interests of the directors. An administrator must provide creditors with a detailed explanation and justification of why the pre-pack was used, thereby ensuring that they are acting within their duty to the creditors. The administrator must also disclose detailed information to creditors such as:-

  • The source of the administrator's initial introduction
  • Any marketing activities conducted by the company and/or the administrator
  • The extent of the administrator's involvement prior to appointment
  • The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration
  • Whether efforts were made to consult with major creditors
  • 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.

SIP 16 also reminds administrators that although the they have the authority to sell assets without the permission of creditors or the court, they still may face potential challenges for conduct under Paragraph 74, or claims for misfeasance under Paragraph 75, of Schedule B1 to the Insolvency Act 1986.

Pre-pack reports tend to be more informative than reports on a business sale. It has yet to be seen whether creditors will use the more detailed report to question whether the administrator has genuinely acted within their duty towards the creditors and whether SIP 16 will have any real commercial impact.

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.