Latest Legal News - Pre-Packs – Are Administrators Exposed? (June 2009)

During the prevailing economic downturn it is increasingly common for failing businesses to try to shed their liabilities by pre-packaged asset sales under the aegis of the Administration process. Where those assets are acquired by a new company which is controlled by the same individuals who owned and managed the old company, creditors often cry foul and increasingly look for possible ways to challenge the process. 

In any administration the administrator may be pursued on the grounds of misfeasance e.g. breach of contract or negligence. Furthermore the Enterprise Act 2001 provides enhanced rights to sue an administrator. These rights include a right of a creditor to apply to Court claiming that an administrator has acted so as unfairly to harm the interests of the applicant.  

There is however a difficulty in bringing such challenges in relation to pre-packs. This stems from the fact that that the decision to enter into a pre-pack is largely a question of commercial judgment on behalf of the administrator and the Court have repeatedly indicated that they are unwilling generally to criticise these commercial judgments made by experienced insolvency practitioners.   In other words, unless the sale has clearly not been for full value based upon a valuation from an independent valuer, the courts will not interfere. 

A new Statement of Insolvency Practice 16 on the subject of pre-packs (SIP 16) came into effect on 1^st January 2009, which may provide an additional source for potential challenges to the conduct of an administrator.  SIP 16 sets out a number of requirements to be met and a procedure to be followed by administrators with the aim of providing transparency throughout the process. In the light of this a failure to have regard to the matters in SIP 16 might give rise to a potential challenge.  

There are also less formal and less expensive ways in which a creditor can raise concerns about an administration including by making a complaint to the regulatory body of an administrator or by contacting the Insolvency Service who have recently stated that they want to hear from creditors who consider that they have been disadvantaged by a pre-pack administration.  

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