Administrations Plans to introduce a three-day “cooling-off” period for pre-packaged sales have been abandoned. Mathew Ditchburn asks whether landlords have been left out in the cold
After nearly two years of discussion and consultation, the Department for Business Skills and Innovation (BIS) announced on 26 January 2012 that it will not be seeking to introduce new legislative controls on pre-packs. These were to include a much heralded three-day notice period for creditors to challenge the sale. Many have been left surprised by the government’s apparent u-turn and dismayed that so much time and effort seems to have come to nothing.
The proposed reforms were meant to be an opportunity to instil greater confidence in the use of pre-packs. Whether they would have achieved this aim is a different matter.
The term “pre-pack” typically refers to a sale of all or part of a company’s business which is negotiated prior to the company going into administration and then completed by the administrator shortly after his appointment. There has been a lot of negative press about pre-packs in recent years. Much of the concern has been voiced by landlords and other unsecured creditors.
The perception is that the pre-pack procedure is not sufficiently transparent, given that negotiations for the sale usually take place without open marketing. Complaints have also been made about the lack of accountability – administrators do not have to obtain prior approval from the court or creditors before pre-packing the business. The end result is often that creditors are left unconvinced that the best price has been achieved, especially where there is a nil return for unsecured creditors.
Supporters of pre-packs argue that they can result in a quick and relatively smooth transfer of a business. It is said that pre-packs minimise the erosion of supplier, customer and employee confidence and save more jobs than a normal administration.
Despite attempts to improve transparency, pre-packs remain controversial, particularly where the sale is to a connected party, such as management, the directors, or a group company, in the form of a “phoenix company”. Against this background, SIP 16, a statement of insolvency practice, was introduced by the Insolvency Service listing the information which an administrator should disclose to creditors following a pre-pack. This has improved matters, but SIP 16 has no statutory force and only provides for information to be given after the sale has completed.
Cooling off the reforms
Following a period of consultation and a statement by Ed Davey, the minister in charge of BIS at the time, that measures would be introduced to improve transparency and tighten controls on pre-packs to connected parties, draft reforms were published by the Insolvency Service in June last year. These included a new requirement for any administrator proposing to pre-pack the business to a connected party to give at least three days’ notice to all known creditors.
The proposed reforms were not well received by either side of the debate. Lenders and insolvency practitioners thought the three-day “cooling-off” period would jeopardise many pre-pack deals that might otherwise salvage the business and preserve value for creditors. Many landlords and other unsecured creditors felt that the notice period would not be long enough for them to do anything to stop the sale. In theory, it would be possible to put together an alternative offer in that timescale or go to court for an injunction, but it was unlikely ever to happen in practice.
Nonetheless, the government was, until as late as November last year, insistent that the reforms would go ahead. This has proved not to be the case, with Davey’s announcement that the legislation will not proceed. Instead, the government will assess how existing controls, including SIP 16, have been working and whether more can be done to improve transparency within the existing regulatory framework.
Perhaps creditors should not mourn the loss of the cooling-off period, which was always going to be of marginal use, and the reality is that challenges to pre-packs are few and far between.
Best value for creditors
One less contentious part of the proposed reforms that could have made a difference was the very sensible proposal for administrators to have to declare that the pre-pack presented best value for creditors. The issue for creditors is that no-one, including the administrators, the company, its directors or the bank, has to put their name to it and say it is the best deal achievable. By giving the proposed statement, the administrator would be staking his professional standing on the sale. This would have helped to minimise abuse and increase confidence in the process. Sadly, it is not now going to reach the statute books.
Perhaps the proposal will resurface in a revamped SIP 16. If so, it should go hand-in-hand with reforms to the regulation of insolvency practitioners, on which the government has already consulted. The current and sometimes opaque system of seven industry regulators and the Insolvency Service could, for example, be replaced by a single independent complaints body.
Another possibility that has been mooted for some time is to require administrators to seek the court’s approval before completing a pre-pack sale to a connected party.
There are obvious attractions to building the independent scrutiny of a judge into the process. Further analysis suggests that the idea may be difficult to implement. First, would a court be willing or able to veto a pre-pack based on the commercial merits of the sale? Second, it would not be feasible to allow all (or perhaps any) creditors to attend court to object to a pre-pack. If it was then rubber-stamped by the judge, would that harm the creditors’ ability subsequently to challenge it? The end result might be substantially increased legal and professional fees and greater demands on court time but creditors left feeling that they were no were better protected than before.
Pre-packs back on the agenda
The concerns of creditors about the use (and abuse) of pre-packs are often legitimate and some will be left disappointed with the lack of increased controls. At the same time, pre-packs can be used to achieve the best return to creditors. With the economy going into reverse and company voluntary agreements proving to be no guarantee of long-term survival, pre-packs are firmly back on the agenda. Arguing that they are wrong in principle and should be outlawed is unlikely to advance that debate.
In the end, the government has decided that imposing rigid constraints on pre-packs risks forcing more companies into liquidation and would be detrimental to the rescue culture. If measures like SIP 16 can be strengthened to address creditor concerns, then the public image of pre-packs might yet improve.
Mathew Ditchburn is a partner in Hogan Lovells’ real estate disputes team
