Pre-pack administration, and how to complain about misuse of the process.

A pre-packaged (or ‘pre-pack’) sale, is an arrangement where the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator.

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What is a pre-pack sale?

A pre-packaged (or ‘pre-pack’) sale, is an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, following which the administrator effects the sale immediately on, or shortly after, appointment. They are a means by which administrators realise the assets of an insolvent company.

Who decides if a business is suitable for a pre-pack sale?

Pre-pack sales are executed by administrators, who must be qualified to act as licensed insolvency practitioners. They are required to exercise commercial and professional judgement in deciding how best to realise the assets of insolvent companies and maximise the return to creditors.

What are the benefits of pre-pack sales?

Pre-pack sales are generally executed before the insolvency of the company becomes widely known – this can preserve asset values and jobs that may otherwise be lost, and can help to enable a viable business to continue.

Will I receive any payment for the debts owed by the company?

That will depend upon the amount realised for the assets of the company, and amounts due to other creditors including those who hold security or whose debts have preferential status (e.g. employees). Administrators are required to send their proposals to creditors within 8 weeks of their appointment, which will contain information about the prospects of payment to creditors. It is an unfortunate reality that when a company is insolvent it is unable to pay all of its debts, and so many creditors will not receive payment in full.

Why did I not receive any notice in advance that a pre-pack sale was being planned?

The courts have held that administrators have the power to sell the assets of an insolvent company without prior reference to the general body of creditors. Ultimately, administrators act under the supervision of the court, and it is open to creditors or members to apply to the court if they believe that the administrator has acted in a way so as to unfairly harm their interests.

Doesn’t SIP 16 require administrators to notify creditors of pre-pack sales?

Statement of Insolvency Practice 16 (SIP16) is a mandatory professional standard which requires all insolvency practitioners to provide creditors with an early detailed explanation and justification as to why a pre-pack sale was undertaken after the sale has taken place. If you are unhappy about the information provided under SIP 16 then you should in the first instance contact the administrator.

Why are the same directors in charge of the new company and continuing to trade?

It is often the case that the best offer for the business or assets of an insolvent company may be from the existing directors or management team. There is nothing in law to prevent a director of a company that has failed from forming a new company, provided they are not disqualified, personally bankrupt or the subject of a bankruptcy restriction order or undertaking. There are, however, measures in place to ensure that the privilege of limited liability is not abused.

Published 24 June 2014