It's Better Than Nothing

Q&A Pre-pack administrations may offer the best outcome for unsecured creditors

Explanation

Old Co is subject to a pre-pack administration. This means that it has been put into administration and its business and assets have been sold under a sale that was arranged before the administrator was appointed. This procedure is becoming increasingly common in the current economic climate.

Advantages and drawbacks

A pre-pack sale provides for a quick transfer of the business; it can minimise loss of confidence on the part of suppliers, customers and employees and save more jobs than a normal administration. However, such arrangements are perceived as being too opaque. Since the Insolvency Act 1986 does not expressly provide for pre-packs, administrators do not have to obtain prior approval for such sales from the court and creditors, as they would in a normal administration. As an unsecured creditor, you would not have received prior warning of the sale and were unable to consider the proposal. Secured creditors would have been consulted because they would need to release their security to enable the sale to proceed. The limited marketing associated with a pre-pack sale may give the impression that the interests of unsecured creditors have been disregarded. The process also resembles asset-stripping, particularly where the business and its assets are sold to the original owners. This is similar to the unlawful practice of creating phoenix companies.

You should request information from the administrator under the Insolvency Service's Statement of Insolvency Practice 16 (SIP 16). Under this, administrators have to explain to creditors the background to their appointment and why a pre-pack offers the best outcome.

An administrator must also disclose: (i) the identity of the buyer of the business or assets; (ii) any valuation of the business or underlying assets; (iii) which alternative courses of action were considered; (iv) the consideration for the sale or the terms of payments; and (v) any connection between the buyer and the directors, former directors, shareholders or secured creditors.

Creditors have a statutory right to bring an action against an administrator under sections 74 and 75 of Schedule B1 to the 1986 Act if the administrator has unfairly harmed a creditor's interests, is not performing his functions quickly and efficiently or in the case of misfeasance. However, the only case to date in respect of SIP 16 determined that a failure to...