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Changes to the pre-pack rules and a reminder of why they were introduced

Print publication

08/02/2016

Pre-packaged sales in administration (or “pre-packs”) are back in the spotlight. [1] On 1 November 2015, a new SIP 16 – the standard that regulates pre-packs – came into effect. The revised standard is partly a response to a perceived lack of public confidence in the transparency surrounding pre-packs and suggestion that creditors were not adequately protected under the then existing regime.

Shortly before the new SIP 16 took effect, the High Court gave judgment in Capital For Enterprise Fund A LP and another v Bibby Financial Services Limited [2]. This case concerned a pre-pack sale of the business and assets of a software company (the Company). The purchaser was a newly incorporated company, owned as to 30 per cent by one of the Company’s directors (the Director) and as to 70 per cent by a major creditor and supplier of essential services to the Company’s business. The Director negotiated the pre-pack sale but did not inform his fellow directors nor did he take into account the interests of the other creditors. It was arguable that greater value would have been realised by the stand-alone sale of the Company’s proprietary software.

The High Court ruled that the Director had breached his duties to the Company and its creditors. He had a duty to act in the best interests of all the creditors, not just the largest creditor. He also had a duty to inform the board of the proposed pre-pack sale. Although the sale helped to save the Company’s business, it was not in the best interests of the Company or its creditors.

The case is indicative of the criticism from some quarters that has been levelled at pre-packs. It is also a reminder of the requirement for a director of a company facing financial difficulties to distinguish between the interests of the business of the company and the interests of the company and its creditors. It is very easy for directors (and those advising them) – and understandable, when working under pressure to secure a deal – to believe that the two are the same thing, but this will not necessarily be the case.

The reform to the pre-pack process introduced by the revised SIP 16 is targeted at the mischief identified in the High Court case, although the focus is on ensuring that an enhanced level of information is made available to creditors after the pre-pack has been effected. It does this by requiring the administrator’s statement to creditors to include a narrative to explain all the steps that were taken and all the alternatives that were considered when deciding whether to effect a pre-pack, to show that it was appropriate.

The new SIP 16 mandates more extensive marketing of a business prior to a pre-pack sale than might have historically been the case or, alternatively, obliges the administrators to explain why this was not conducted. The new standard also includes the option for a purchaser who is connected with the company, to approach a pre-pack pool (which will provide an independent assessment of the appropriateness of the sale) and connected parties can submit viability statements, to explain what the purchasing entity will do differently so the business will remain viable. So far, it appears that there has been limited take-up for the pre-pack pool option.

The introduction of the new standard will mean changes to the pre-pack process. The duty of the directors of the insolvent company remains unchanged, however – and this is to act in the best interests of the company and its creditors.

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[1] A “pre-pack” is the process by which a company is put into administration and its business and/or assets are immediately sold under a sale arranged before the appointment of the administrator.
[2] [2015] EWHC 2593 (Ch)

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