Member Article

With effect from 1 January 2009, new rules require administrators to provide information to creditors on a range of detailed issues when carrying out a pre-pack sale in an administration.

Pre-packs are the process during which a troubled company and a proposed purchaser reach an agreement before an administrator is appointed, relating to the sale of all or part of the company's business or assets. When the administrator is appointed, the administrator effects the sale immediately on, or shortly, after his appointment.

Role of pre-packs
Pre-packs have been used for many years, and have a number of advantages. In particular, they are used to:

• permit the preservation of the residual value in a company, particularly one which is dependent on its intellectual property or brand
• permit a seamless continuance of trading
• protect jobs

Criticism of pre-packs
Despite their advantages, pre-packs have attracted criticism, particularly where the transaction involves a re-sale of all or part of the business to the previous management team. This is sometimes seen as a 'con' designed to enable the business owners to shed liabilities and trade-on, leaving creditors out of pocket.

There has been particular criticism of the lack of transparency in the way in which pre-packs have been put into practice. In the current financial climate for example, the Association of British Insurers (AIB) has been holding crisis talks with the Department for Business Enterprise and Regulatory Reform about the ailing credit insurance industry.

The AIB told the department that the rules governing pre-packs should be changed to stop suppliers and other unsecured creditors suffering serious losses.

In the face of such comment and criticism, there has been a strong body of opinion arguing that such practices should be more regulated. The dilemma the regulators have faced is how to impose such regulation where it is not possible by definition to consult creditors in advance of a pre-pack sale taking place.

Outcome and new regulations
The new rules will be binding on administrators, and departure from the relevant standards is a matter which may be considered by the relevant regulators for the purposes of possible disciplinary or regulatory action against any administrators who offend.

The new rules require certain information to be disclosed to creditors in all cases where there is a pre-packaged sale.

The detailed rules list 17 items which must be covered, but the most important include:

• the extent of the administrator's involvement with the company and its directors prior to his appointment
• any marketing activities conducted by the company and/or the administrator and any valuations obtained of the business or the underlying assets
• why it was not appropriate to trade the business and offer it for sale as a going concern during the administration
• whether efforts were made to consult with major creditors
• the date of any transaction disposing of assets, the details of the assets involved and the nature of the transaction
• the price paid for the assets disposed of, the terms of payment and other relevant conditions.
• the identity of the purchaser
• any connection between the purchaser and the director, shareholders or secured creditors of the company

Administrators who implement a pre-pack sale must circulate all the relevant information to creditors as soon as possible after the administration is commenced. In practice, therefore, creditors will know the position shortly after the appointment of administrators.

Effect of the new rules
The new rules formalise the arrangements which reputable administrators have followed for some time. It is encouraging to note that these requirements are being introduced, and they should give creditors more visibility of the progress of a company that has gone into administration.

 

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