“Pre-pack” is the term used to describe
the sale of an insolvent business by an IP appointed as the Administrator
of the insolvent company under the Insolvency Act 1986 (as amended by
the Enterprise Act 2002) on the basis of an agreement negotiated before
the Administrator is appointed.
The sale, which is sometimes, though
not always, made to the previous directors or managers of the insolvent
business, is then rapidly executed by the Administrator without the business
being offered on the open market and without prior consultation with
the full body of creditors. During 2006 there was a lively debate within
the insolvency profession and outside on whether pre-packs, the use of
which appears to be increasing, were sometimes being resorted to where
they were not justified.
There is a wide consensus between insolvency
practitioners, their regulators and creditors’ representatives
that the pre-pack is a necessary and useful tool for saving a business
where any delay in selling the business or the process of marketing it
are likely to destroy or reduce its realisable value (an example is where
the sole assets of the insolvent company are its staff). The IPC shares
this view. However, two concerns about the way in which pre-packs are
operated were also expressed in the debate.
first is that in some cases pre-packs are being used when the business
could and should have been marketed more widely, even for a short period
of time, to see whether any higher offers were forthcoming. The second
is that serious conflicts of interest can arise if an IP, who has been
acting as an adviser to the original company, to its directors or managers
or to an interested third party, is subsequently appointed as the Administrator
to execute a sale, on which he or she may have previously given advice
to one or more of the interested parties.
The Administrator is required
to have regard to the interests of all the creditors (including the unsecured
creditors) in deciding what should be done with the insolvent company
or its business in accordance with the priorities set out in the Enterprise
He or she also has to consider whether the conduct of the directors
of the insolvent company has been appropriate in the period preceding
the insolvency and to report on this to the Secretary of State. If the
IP appointed as Administrator has previously been advising the original
company, its directors or managers or a connected third party on the
future, he or she will face a risk of “self
review”, i.e. having
to assess the appropriateness of his/her own previous advice. In these
circumstances the IP needs to consider whether he or she will be seen as
sufficiently independent to accept the appointment as Administrator.
understand that the Insolvency Service is preparing (secondary) legislation,
which would require Administrators who have executed a pre-pack to
make a full report to all the creditors explaining why a prepack was used
in the particular case. (The legislation would also enable fees earned
by an IP prior to the appointment of an Administrator to be recovered [subject
to the creditors’ approval]
from the proceeds of the sale of the business through a pre-pack). The
IPC welcomes this proposal.
We think it is essential that the Administrator
should be required to include in his/her report to creditors a specific
explanation of why the business was not offered on the open market, even
for a short period of time, and why doing so would have been detrimental
to the value of the business. A mere assertion that the pre-pack offer
produces a higher price than a valuer has estimated for a hypothetical
sale should not be regarded as a sufficient justification for setting aside
the presumption that putting the business up for sale on the open market
would normally be the surest way of maximizing the return to creditors.
IPC also considers that further action is needed to ensure that IPs are
seen to deal appropriately with the conflicts of interests described above.
Arguments have been put to us that
the conflict of interest can be discounted without detriment, because the
IP can reasonably be expected to have been giving consistent “seamless” advice
both pre- and postappointment as Administrator. It is also argued that
the need for an independent administrator is lessened, because normally
in a pre-pack there is no money left over for the unsecured creditors.
do not find these arguments persuasive. The first ignores the fact that
the conflict of interest test, as stated in the DTI’s “Guidance
to Professional Conduct and Ethics for persons authorised by the Secretary
of State as Insolvency Practitioners", is whether “the
objectivity of the IP in carrying out a subsequent insolvency appointment
might be, or be seen to be, impaired” (emphasis
The second argument begs the question as to whether an open market
sale of the business might have produced a better price. In any case, when
there is no money left for the unsecured creditors the need for an independent
report on the conduct of the directors is more than usually important for
them, particularly where the business is being sold back to directors.
We recommend that the Insolvency Service should require
Administrators, when reporting on a prepack to the full body of creditors,
to give a prompt reasoned explanation of why they decided against putting
the business up for sale on the open market even for a short period and
why doing so would have been detrimental to obtaining a better price for
the sale of the business.
regards conflicts of interest in relation to potential pre-packs, the RPBs
should draw their IPs’ attention to the existing ethical requirement
on IPs to consider, before taking any appointment as an office-holder of
an insolvent business, whether any previous material business connection
they may have had with the insolvent company, its directors, managers or
other connected third parties may put in question, or be seen by other
parties to put in question, the independence and objectivity the officeholder
needs to have. We further recommend that the RPBs consider whether any
more detailed guidance should be given to the profession on this matter.
also recommend that the RPBs should monitor how Administrators have handled
potential conflicts of interest in pre-pack cases. To facilitate monitoring,
IPs who accept appointments as Administrators in pre-pack cases having
previously been involved in advising the company, its directors or managers
or other connected third parties on the option of a pre-pack sale, should
disclose this connection in their report to the full body of creditors
and explain how they have handled the potential conflict of interest.
Home I News I Contact
IPC I Useful Links I About