Administration and Pre-Pack Sales
Following the reforms introduced by the Enterprise Act 2002, Court involvement in the process of Administration has been reduced. The majority of appointments are now instigated by the out of court route and Administration Orders are therefore rarely the subject of substantial judicial comment. Negative publicity regarding the growth of “pre-pack” administrations, under which the sale of a company’s business or assets is negotiated prior to the appointment of an administrator and is effected immediately after the administration appointment, led to the Joint Insolvency Committee issuing a Statement of Insolvency Practice SIP 16 on “pre-packaged sales in administrations” which came into effect on 1 January 2009.
The recent decision of the English High Court in Re Kayley Vending Limited has brought some welcome additional guidance to the insolvency profession regarding “pre-pack” administrations, particularly where the administration comes about through an application to the relevant Court.
Background
Kayley Vending Limited (“Kayley”) supplied cigarette vending machines to public houses and had suffered cash-flow problems, largely due to the introduction of the smoking ban. The Revenue had presented a winding up petition in respect of debts totalling £79,000 and had previously blocked a proposed Company Voluntary Arrangement (CVA).
Because the winding up petition was pending, the out of court route to administration was not available. Kayley’s directors therefore presented a Petition to the High Court for an Administration Order and the Court was specifically asked to give guidance to the profession in relation to pre-pack administrations.
The directors, with the assistance of the proposed administrators, were negotiating with two potential purchasers to sell the business as a going concern. Neither of the potential purchasers had any connection with the directors.
The Decision
The Court granted the Administration Order and made a number of observations:-
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Applicants who seek an administration order from the Court with a pre-pack arrangement in place need to ensure that the Court is supplied with sufficient information on the proposed sale. This will enable the Court to determine whether the proposed deal is in the best interests of the creditors as a whole. This information should be provided at the outset and not only in circumstances where the Petition is opposed.
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Best practice would be to comply with the requirements for the provision of information set out in Statement of Insolvency Practice (SIP) 16.
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Commercially sensitive information should be separated for the Courts so it can be excluded from inspection.
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Pre-administration costs would be treated as an expense of the administration in terms of Para 13(1)(f) of Schedule B1 which gives the Court discretion to make any order it thinks appropriate.
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The Court was satisfied in this case that the form of administration and pre-pack deal were of benefit to the creditors. In making the order under Para 13, the Court ensured that the issue of expenses will be considered on a case by case basis rather than finding that pre-appointment costs would in all cases be allowed as costs of the applicant (in terms of Rule 2.6 of the Insolvency Rules 1986).
The Implications
The Judge was keen to emphasise that he did not intend to add to the requirements of Schedule B1 or the Insolvency Rules and that it would be a matter for each Judge to consider administration applications on a case by case basis taking account of all the information which is provided. Nonetheless the decision gives some useful guidance on the likely approach of the Courts to pre-pack administrations.
In relation to the issue of pre-appointment costs, these will be allowed as an expense in circumstances where the pre-pack deal is of benefit to the creditors. In this case the benefit to creditors outweighed the benefits to any other party (such as the management of the insolvent company) as there was no question of the assets being sold to the management. This suggests that where the pre-pack involves selling to the existing management, the Court may be reluctant to allow such costs to rank as an expense.
In view of the proportion of Administrations which are instigated using the out of Court appointment route, the Courts have had limited involvement in the pre-pack debate thus far. While this case offers useful guidance where the out of court route is not available because of a pending winding up petition, it is likely that the issues arising and the Court’s findings will be relevant where practitioners seek to obtain the Court’s ‘blessing’ for a proposed pre-pack. Such pre-emptive approval is becoming more common where practitioners are dealing with a particularly sensitive pre-pack, and petitioners would be well advised to take note of the Court’s approach here.
For further information please contact: Gordon Hollerin
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