Caging the Phoenix - tightening the controls on pre-packs
12 April 2011
This article was included in the spring 2011 issue of
Informer - the real estate newsletter.
The last few years have seen a rapid growth in the use of
pre-packaged administrations (pre-packs). These are used where a
failing company has lined up a the sale of all or, more usually,
the profitable parts of its business by its administrator
immediately after falling into administration. Such deals are
inherently secretive and there is seldom any hard information
available to show that the price paid was appropriate, as there is
usually no prior marketing. When the buyer is connected to the
failing company, it is natural to question if a proper price was
paid or if the creditors have just been "taken for a ride".
The Government has decided that the code of practice brought in
by the UK's insolvency practitioners (Statement of Insolvency
Practice 16) is not sufficient. Under the current arrangement, an
administrator is obliged to put together a report, after the event,
with the following information:
- detailing why a pre-pack administration was believed to be
appropriate; and
- setting out in this report sufficient details for the company's
creditors so that they can be satisfied they have not been
disadvantaged.
This after-the-event reporting regime has failed to allay the
fears of creditors in particular where the purchasing party is
connected to the company in administration - so called
"Phoenix" companies.
To address the problem, the Government announced on 31 March
2011 a proposal that where a company in administration is proposing
to dispose of a significant part of its assets of to a connected
party, and where these assets have not been overtly marketed, the
sale would only be permitted after a suitable notice period
expires. The current proposal is for a three day notice window.
Not unsurprisingly, this has polarised the opposing sides with
R3, a representative body of administrators, claiming this is too
long and that three days could kill any chance of a sale as a going
concern. Whereas the British Property Federation, which represents
landlords’ interests, is looking at a window of at least seven
days.
Given that we seem to be in a second wave of pre-packs and CVAs,
and with pre-packs to connected parties currently running at
approximately 40%, the proposed notice regime looks to be something
which will be the subject of intensive lobbying as the proposal
starts to be fleshed out.