Vol 6 (2009) - Issue 5

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Pre-Pack Administration Sales in the Matter of Re Kayley Vending Limited [2009] EWHC 904 (Ch)

Pre-pack administrations (‘pre-pack(s)’) are the focus of much attention in the current financial climate. A pre-pack describes a situation where a company’s business and assets are sold on terms that are negotiated between the purchaser and the administrator ‘in principle’ before the company formally enters into an administration. The sale is carried out on, or shortly after, the appointment of the administrator and in private with limited disclosure or control available to creditors.

Pre-packs have been the subject of significant comment and controversy but are becoming increasingly common. There is a growing body of evidence that the number of pre-packs has increased sharply since the coming into force of the Enterprise Act 2002 made it simpler for companies to enter into administration through the introduction of an out-of-court route for the appointment of an administrator. Recent high profile examples include the sale of MFI and Whittards of Chelsea.

The use of pre-packs has been the subject of much negative publicity. Criticisms of pre-packs include their susceptibility to abuse, lack of (or insufficient) transparency for creditors, lack of exposure to competition or the open market, frustration of the rights of stakeholders to participate in the decision-making process, and the so-called ‘phoenixing’ of companies (where existing management buy back the business following private negotiations with an insolvency practitioner and then continue to trade free of the original debts through a new ‘phoenix’ company).

In response to these concerns the regulatory bodies responsible for supervising the conduct of licensed insolvency practitioners published the Statement of Insolvency Practice 16 entitled ‘Pre-Packaged Sales in Administrations’ (‘SIP 16’) in January this year. SIP 16 aims to increase the transparency of pre-packs and has been welcomed by some practitioners and the government alike.

SIP 16

SIP 16 relates only to administrations and sets guidance in relation to ‘good practice’ together with requirements for licensed insolvency practitioners who conduct pre-pack administrations. Although not legally binding, SIP 16 is a statement of fundamental principles and processes which insolvency practitioners should comply with and failure to do so could result in disciplinary action against a practitioner.

Paragraph 8 states that:

‘it is in the nature of a pre-packaged sale in an administration that unsecured creditors are not given the opportunity to consider the sale of the business or assets before it takes place. It is important, therefore, that they are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests’.

In particular, paragraph 9 highlights 17 items of information to be disclosed to creditors in administration cases. These include both factual information about the terms of the sale, how the administrator became involved in the case, and whether there is a connection between the potential purchaser and directors or others involved in the company, as well as other information including details relating to: marketing activities undertaken, valuations obtained; alternative courses of action considered with an explanation of the possible financial outcomes of these; and reasons why it was not possible to trade the business and offer it for sale as a going concern during the administration period.