Pre-Pack Administration Sales-Court Comment - May 09
1 January 2009 heralded Statement of Insolvency Practice 16 (SIP 16) which related to pre-pack admin sales, against the background of adverse press comment and Parliamentary scrutiny.
SIPs are not law. They are a statement of basic principles and processes which Insolvency Practitioners should comply with. Failure to do so can result in disciplinary action against a practitioner.
SIP 16 reminded practitioners that, where they are involved in a pre-pack sale of all or part of a company’s business or assets, they should bear in mind their duties owed to people who could be affected by the transaction. The statement sets out the need to keep a detailed record of the deliberations behind the conclusion to enter a pre-pack sale. In doing so the practitioner would have evidence of the rationale behind the decision which he could call on in the event that any of the “affected parties” sought to challenge the decision.
An upset party could challenge an administrator’s decision in a variety of ways so the SIP was aimed at ensuring that there was documented evidence to counter this if and when appropriate.
SIP 16 particularly provided for information regarding a pre-pack to be disclosed to creditors in administration cases. The information includes details of how the administrator became involved in the case, any marketing activities conducted for the sale of the business/assets, any valuations obtained, the alternative courses of action that the administrator considered and why a pre-pack was seen as the best way forward as opposed, say, to the administrator trading the business and selling it as a going concern. The information to be provided then includes details of the transaction such as the assets sold, the price and terms of payment, the purchaser’s identity and any connection between them and the old board of directors, shareholders and any secured creditors.
Re Kayley Vending Limited [2009] EWHC 904 (Ch)
On 27 February 2009, an administration order was made in the Birmingham District Registry against Kayley Vending Limited (KV) on the application of its directors.
Whilst this was not the first time that the Court had to consider whether to make an administration order in view of a proposed pre-pack sale (see, for example, Re DKLL Solicitors [2007] EWHC 2067 (Ch); [2008] 1 BCLC 112) it is thought that this is one of the first occasions that the Court has had to consider the matter in view of SIP 16. Although the making of the administration order was a fairly simple, and unopposed, matter, the Court was invited to give guidance to Insolvency Practitioners in relation to SIP 16 and the approach the Court would take in relation to administration applications involving a proposed pre-pack.
It is important to note that the Court was dealing with an application for an administration order and was not dealing with an application following a notice of intention to appoint an administrator being filed at Court. We discuss this aspect below.
The Judge hearing the KV application noted that any application for an administration order had to be supported by information and documents. The relevant rules include a sweeper provision that the affidavit in support of the application “shall contain … any other matters which, in the opinion of those intending to make the application for an administration order, will assist the Court in deciding whether to make such an order”.
The making of an administration order is entirely discretionary and anybody applying for one will want to make sure that the Court has as much information as possible on which to base its decision. Given the information which should be provided to creditors under SIP 16, it makes sense that this information is also put before the Court, where available, to assist it in its deliberations. The Judge in KV therefore held that such information, so far as known and ascertainable, should be included in the application. The Judge felt that it would not be appropriate to provide the information only if the application were opposed, as any potential opponent would benefit from the information being provided at the outset. They would be able to make a more informed decision as to whether or not to oppose.
Although the Judge emphasised that he was not intending to add to the rules with regard to what information should be put before the Court, it would appear to be an exceptional case where information to be provided to creditors under SIP 16, if available, is not provided to the Court hearing an application for an administration order. It may, for example, be appropriate to keep commercially sensitive information out of the public domain. The Judge recognised this and suggested that such information might properly be provided to the Court separately from the affidavit or other witness evidence so that it could be excluded from inspection and therefore kept out of the public arena.
Impact on out of Court administrator appointments
Whilst an administrator can be appointed by a Court, an appointment out of Court by the company, the directors or a floating charge holder is possible. This has been the case since the Enterprise Act 2002 which stated that the priority in respect of an administration should be “rescuing the company as a going concern”. For practical purposes this means that a better result will be achieved for the company’s creditors through an administration as opposed to a liquidation.
The non-Court based appointment process involves filing a notice of intention to appoint at Court. The question therefore arises as to whether there are any practical implications from the decision in KV upon this process. At first blush one might think that an ex-parte application ought to be made to the Court, when a pre-pack sale is envisaged, to get some form of “approval” to the proposed transaction.
However, if this were the conclusion then this:-
• would cut across the principles of the process introduced by the Enterprise Act 2002 and reintroduce the Court into a process which was intended to allow the appointment of an administrator outside of the formal Court process;
• would ignore the administrator’s power to dispose of the business and assets in his discretion, regardless as to whether or not creditor approval had been obtained or sought (Re T & D Industries Plc [2000] 1 WLR 646; Re Transbus International Limited [2004] EWHC 932 (Ch));
• would be to ignore the general principle that the Court should not be used as a vehicle of sanction, that is an “insurance policy” for the practitioner.
The proper conclusion, therefore, must be that an application for sanction of a pre-pack sale need not be made. The practitioner is of course still obliged to deal with SIP 16 and will also have the ability to seek the Court’s sanction or obtain directions where there are particular issues or problems which make the exercise of discretion difficult or onerous, for example, in the case of competing bids for the business and assets.
Conclusions
We must bear in mind that the KV case is a first instance decision. However, the likelihood the decision being revisited in a higher court may be seen as remote in the circumstances.
SIP 16 has practical application within any petition for an administration order. Given the general application of SIP 16, the information should have been gathered in large part and so provision of it to the Court should not be an undue burden.
The decision of KV will not have any practical implications when considering an appointment outside of Court process but SIP 16 must still be complied with.
In appropriate cases the practitioner may seek the Court’s directions or sanction in relation to a pre-pack sale where the exercise of discretion is more difficult.
Edward Davies
Corporate Commercial Partner
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