Re Kayley Vending Ltd
| Jurisdiction | England & Wales |
| Judge | HHJ David Cooke |
| Judgment Date | 15 May 2009 |
| Neutral Citation | [2009] EWHC 904 (Ch) |
| Docket Number | Case No: 8126 of 2009 |
| Court | Chancery Division |
| Date | 15 May 2009 |
[2009] EWHC 904 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
Birmingham Civil Justice Centre
Bull Street, Birmingham B4 6DS
Before : HHJ DAVID COOKE
Case No: 8126 of 2009
James Morgan (instructed by The Wilkes Partnership) for the Applicant
(No other party appeared or was represented)
Hearing date: 27 February 2009
HHJ David Cooke :
Introduction
On 27 February this year I made an administration order in relation to Kayley Vending Limited, on the application of its directors, and indicated that I would give my reasons in writing at a later date, which I now do. Insofar as they relate to the particular application before me they are brief, as the circumstances were largely unremarkable. The purpose of the extended consideration has been to respond to the invitation made by Mr Morgan to give some guidance to the profession as to the approach of the Court to what have come to be called 'pre-pack' administration applications, in the light of the recently promulgated Statement of Insolvency Practice 16 entitled “Pre-Packaged Sales in Administrations”.
Pre-packs are increasingly common, and highly controversial. The term refers to a sale of all or part of the business and assets of a company 1 negotiated 'in principle' while it is not subject to any form of insolvency procedure, but on the footing that the sale will be concluded immediately after the company has entered into such a procedure, and on the authority of the insolvency practitioner appointed. That procedure is now most commonly administration, but not necessarily so. It may for instance be a receivership, though the relative incidence of receiverships has fallen since the reforms introduced by the Enterprise Act 2002, or a voluntary liquidation. Only if it is an administration is the court likely to be involved in the appointment, and even then the administrator is most often appointed out of court by the directors or the holder of a qualifying floating charge 2, so the proportion of pre-packs in which the court has any direct involvement prior to the sale is likely to be small.
It has been the deliberate policy of the legislature, embodied in the changes to the regimes of administration, receivership and voluntary arrangements made by the Insolvency Act 2000 and the Enterprise Act 2002, to reduce the involvement of the court in the initiation of insolvency processes, and, where an application to the court is still required, to simplify the requirements and particularly the information that has to be provided for the purpose. This raises the question whether, if pre-packs are thought to be potentially subject to abuse, the courts realistically can, or should seek to, do anything about the problem by the approach taken in the relatively small number of cases that do come before them before the sale is made, or whether this is a matter for the legislature. I am also conscious that it is not for me to purport to lay down anything that could be construed as being a practice direction, local or otherwise.
SIP 16
SIP 16 is the latest in a series of guidance notes issued by the regulatory bodies responsible for supervising the conduct of licensed insolvency practitioners. It came into force in January 2009 and, as indicated by the title, relates only to administrations. I summarise its contents, I hope not excessively, as follows:
i) It reminds insolvency practitioners, whether advising the company prior to entry into administration or acting as administrator, of their duty, and the duties of those they advise, to parties who may be affected by a pre-pack sale, and that they should keep a detailed record of their reasoning in order to explain and justify the decision to follow that course.
ii) It reminds practitioners that although an administrator has power to sell the assets without prior approval from creditors, the exercise of that power may be subject to challenge under paragraph 74 (unfair harm to the interests of one or more creditors or members) or 75 (misfeasance) of schedule B1 to the Insolvency Act 1986 (“the 1986 Act”).
iii) Specifically, practitioners are reminded of the potential liability of directors and others who caused the company to incur credit in the period prior to entry into administration (referring to potential liability for fraudulent or wrongful trading under sections 213 and 214 of the 1986 Act) and of the duty of the administrator when realising assets to act in the interest of creditors as a whole.
iv) An important statement of principle appears at paragraph 8: “it is in the nature of a pre-packaged sale in an administration that unsecured creditors are not given the opportunity to consider the sale of the business or assets before it takes place. It is important, therefore, that they are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests.”
v) Paragraph 9 contains a list of 17 items of information, which the administrator is required to disclose to creditors (subject to some caveats) with his first notification to them. He is also required to convene the initial creditors meeting as soon as possible after his appointment, presumably in order that the creditors can discuss the information provided and any concerns that they have. The practitioner is required to state the information “as far as [he] is aware, after making appropriate enquiries”, thus placing an onus on him to go beyond merely accepting the directors' unsupported assertion on matters which may appropriately be investigated.
vi) As well as factual information about the terms of the sale, the information required includes a number of items directed to the question whether a better price might have been achieved by an alternative course of action, which would normally be to continue to trade the business as a going concern whilst marketing it to other potential purchasers. Thus the administrator is required to state:
a) the extent of his involvement prior to appointment
b) any marketing activities conducted or valuations obtained
c) the alternative courses of action that he considered, with an explanation of possible financial outcomes
d) why it was not possible to trade the business and offer it for sale as a going concern during the administration
vii) other matters relate to possible concerns creditors might have about benefits of the transaction to the directors or persons involved with the company; hence there is a requirement to disclose any connection between the purchaser and such persons, whether directors have given guarantees to any financier, and the nature of any wider transaction of which the sale forms part.
Mr Morgan makes the point to me that, in most cases, it should not put any undue burden or expense on the proposed administrator to provide much or all of the information required by SIP 16 to the court at the time the application for an administration order is made. This is because the proposed administrator will, in the nature of a pre-pack, have been involved in the negotiations for the sale, will be conscious not only of his general legal duties in considering the proposed transaction but also of his obligations under SIP 16 and will be collecting the required information during the pre-appointment period in order to comply with those obligations. There may be certain parts of the information which it would be commercially sensitive to have available to any person who may inspect the court file, but any such information could be protected by an appropriate direction pursuant to Rule 7.31(5).
Pre-packs, and concerns about them
I propose to examine briefly the nature of the concerns that have been expressed about pre-packs, and then the way in which the provisions of the 1986 Act as now in force, and the case law to date, have operated to give rise to them. The principal advantages of a pre-pack are well-known; they are that the process enables a business to be sold quickly, with the minimum possible adverse impact from either the public knowledge of its insolvency or the restrictions imposed by the insolvency process itself. Employees can be retained who might leave, or have to be dismissed, once a formal insolvency starts. Continuity of customer and supplier contracts can be maintained. Even if a going concern sale might be achieved by an administrator, the period of trading in administration whilst it is negotiated requires to be funded and may in any event result in a damaging leaching away of business.
The Association of Business Recovery Professionals publishes some helpful material on its website 3, including a paper by Dr Sandra Frisby entitled “A Preliminary Analysis of Pre-packaged Administrations”. In that, she summarises the debate as being whether pre-packs are an appropriate and effective method of realising the assets of an insolvent business and sets out a number of specific objections:
“a pre-packaged business has not, by definition, been exposed to the competitive forces of the market, which may lead to the business being disposed of for a consideration less than would have been obtained had it been marketed for an appropriate period
where a pre-pack is effected through administration, the rights of stakeholders to participate in the decision-making process, as envisaged by the Insolvency Act1986, are frustrated
the pre-pack process is insufficiently transparent: creditors, or at least certain classes of creditors, are not provided with information adequate to allow them to measure whether the practitioner has carried out is functions in a manner that has not improperly or unlawfully prejudiced their interests
… a lack of transparency...
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