Phoenix from the Ashes?

Creditors entitled to more information about ‘pre-packs’

With more and more companies being forced to consider insolvency procedures, creditors have become increasingly concerned by the widespread practice of ‘pre-pack’ administration.

Following the adoption of the Enterprise Act 2002, the practice of ‘pre-packaging’ the administration process has become increasingly common. In a pre-pack, the debtor company is placed into administration and the business and assets are sold immediately after the appointment of the administrator, often to the directors of the debtor company and often without the business and assets first being marketed.

Creditors, perhaps understandably, are often suspicious of such transactions, the perception being that the business might have been sold at an undervalue. However, tighter regulations were introduced earlier this year to try to ensure that the interests of creditors are not being prejudiced.

The Insolvency Service issued its Statement of Insolvency Practice 16 (SIP 16), which requires the administrator to demonstrate to creditors that the decision to enter a pre-pack arrangement was made in the interests of the company’s creditors as a whole. In doing so the administrator must provide creditors with detailed information such as the identity of the purchaser and any links that the purchaser had with the directors and shareholders of the debtor company, any valuations of the business, the sale price and payment terms, any alternative courses of action considered and the extent of the administrator’s involvement prior to appointment.

Although SIP16 does not give creditors the power to prevent the pre-pack from proceeding, it does ensure that creditors are provided with sufficient information to enable them to challenge the actions of administrators if they believe that a pre-pack was not in their best interests.