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Pre-pack Administrations - A Done Deal?

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Pre-packaged administrations have become increasingly common in recent years and the current economic downturn has seen some high profile names following this route into and then out of administration. Yet despite the increased volume of pre-packs, they are still sometimes regarded with suspicion by some creditors and many non-insolvency professionals.

A pre-pack deal, takes place where an agreement for the sale of an insolvent company's business and/or assets has been put in place before the company formally enters administration. The speed with which this process takes place and the fact that there is often little or no open advertisement of the company being for sale sometimes raises concerns amongst creditors. These may include concerns that:

Notwithstanding the concerns in certain quarters pre-packs continue to be a popular tool for insolvency professionals. As mentioned above, speed is a key factor in most pre-pack deals and is perhaps the most obvious advantage. Pre-packs also tend to be highly successful in terms of employee retention, as evidenced by the fact that in 92% of pre-pack cases all of the employees are transferred to the new company.

Prior to the sale of an insolvent company, insolvency practitioners will require a valuation of the company's assets to be done. Any pre-pack deal will normally only be agreed where the offer presented to the proposed administrator is above the level of the valuation, ensuring the best outcome for creditors is achieved.

Additionally pre-packs, allow companies to maintain continuity of supply and achieve a satisfactory result in cases where the business cannot afford to continue trading whilst looking for potential purchasers. It is also fair to assume that pre-packs are also popular as they negate the need for incurring expenses during lengthy sale proceedings.

The Courts have in recent years given a significant legal boost to the case for pre-packs with the House of Lords finding in DKLL Solicitors v Revenue and Customs [2007] ECWHC 2067  that a majority creditor does not have a final veto on an administrator's proposals. In this case, HMRC as the majority creditor opposed the proposal of a pre-pack administration as they felt liquidating the company would produce a more satisfactory result to creditors. A key factor in the House of Lords' decision was that the pre-pack deal which was presented, offered a realistic opportunity to preserve jobs that would otherwise have been lost following a liquidation.  

There has at the same time been a move toward ensuring that the process is not abused. Re ULVA Ltd (In administration); DRC Distribution v Foster and others[2007] EWHC 1716, QB establishes that the Court will not uphold a sham distribution of assets and will hold directors and administrators liable for the costs of any such action. In addition the Statement of Insolvency Practice 16 (SIP 16) came into effect in January of this year. The aim of this document is to provide detailed guidelines in an effort to set and maintain standards for insolvency professionals when dealing with a pre-pack administration. In reality many insolvency practitioners had put in place their own checks and procedures along the lines of the SIP 16 provisions which require greater transparency and openness with creditors.

With the effects of the recession still being felt by businesses around the country, pre-pack administrations look set to continue to be widely used as a means to save distressed businesses, although the availability of funding for the purchasing party is an ever increasing obstacle in a tightening lending market.

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