Pre-Packs: A Coming Of Age?

Originally published in the November 2009 issue of In-House lawyer.

The Pre-Pack Administration, after some difficult formative years, appears to have emerged as a legitimate restructuring tool. Criticisms levelled by creditors, certain that they are getting a bad deal, have been numerous and, as a consequence of actions by creditors, the pre-pack has been put under the microscope in court. Out of all this has emerged something that appears to be seen by the court as a process that is compliant with statutory rules and policy. This article looks at the development of the prepack and asks whether it has now 'come of age'.

The Enterprise Act (EA) 2002 paved the way for a company and/ or its directors to appoint an administrator without judicial scrutiny through the out-of-court route. This soon led to the mushrooming use of the pre-pack administration: a pre-arranged sale of a distressed business that is executed by the administrator immediately after their appointment. There are no statutory provisions referring to pre-packaged sales as a permitted business rescue tool and, because statute itself does not provide a clear answer in relation to their legality, it has been left to the courts to decide whether it is a legitimate procedure.

Pre-Enterprise Act 2002

Critics of pre-packs argue that they are essentially no different from an old-fashioned liquidation sale to a 'phoenix' company controlled by the same directors. Is this really fair comment?

In the well known case of Re Centrebind Ltd [1967], the members of an insolvent company resolved to go into voluntary liquidation and appointed a liquidator who, ahead of the creditors' meeting, took action to prevent a creditor (the Inland Revenue) from exercising a right of distraint over company assets. The court held that the process was valid. The liquidator had power to act in the period between appointment and the creditors' meeting. Subsequently, the loophole created in the Centrebind decision was often abused and Centrebinding became a device too often used by rogue directors. By this route, working with the liquidator, management could effectively sell the company's business and assets to a new company controlled by themselves, usually leaving the creditors with nothing.

Of course, Centrebinding emerged in the days when there was no requirement for liquidators to be licensed insolvency practitioners and there was nothing like the degree of regulation of the insolvency profession that now exists. The law was revamped in the Insolvency Act (IA)1986, including the introduction of s216 – restriction on re-use of company names, which was specifically intended to prevent Centrebinding. Section 216 is aimed at directors who take part in the promotion, formation or management of 'phoenix' companies (whether as a director or not) following an insolvency sale and breach of its provisions will, if convicted, lead to imprisonment or a fine. As well as this criminal sanction, s217 imposes personal liability for the company's debts on those involved in the management of a 'phoenix' company in contravention of s216. Clearly, these 'phoenix provisions' need to be complied with by those taking part in or advising on a prepack sale if it is likely...