Thursday, 19 November 2009

The vexed subject of pre-packs

I apologize for the long week and the consequential delay to this post. We have been in the midst of an injunction. That is the same as journalists saying they are "on a deadline". They are both annoying phrases but they do unfortunately both mean the same - that you concentrate on one thing alone particularly when, in our case, we are to seek to discharge it on the back of material non disclosure and a lack of full and frank disclosure to the Court. It promises to be an interesting discharge application and there may be some red, or crimson, faces on one side of the Court, and a Judge who may be a darker shade. Judges do not like being misled on without notice hearings.

Back to the matter in hand. Love 'em or hate 'em, pre-packaged administrations are a regular diet to the insolvency teams around the country. They create a mixed reaction depending on whether you act for the IP, the Newco, the directors or the creditors. But one class of foot soldier invariably has a similar viewpoint, and that is the shareholder. Invariably he is looking at a position where his entire holding has been wiped out and there is little he can do about it. Now the shareholder's place is low indeed when it comes to insolvency priorities, and we all know that duties of IPs' are owed to creditors, and their reports are for their eyes only, but of course those reports do end up being filed at Companies House. And shareholders read them. Often disgruntled shareholders. There is seemingly little than an individual shareholder can really do other than become more disillusioned with the process when he's soaked it all in. The legislation certainly does not appear to assist him (note The Times headline - Shareholders face wipeout after Regent Inns goes into pre-pack - here)

When you act for an institutional shareholder as we do, however, who has invested many millions into a company and who has a grievance (no relation to the above), does the position change? Can, for example, the shareholder glean anything from the fact that reports have been submitted to the Disqualification Unit - knowing, of course, that office holders have a duty to report if they become aware of conduct that warrants or could give rise to disqualification proceedings. We know from the Insolvency Service that there is no initial evidence that the level of director misconduct in pre-packs (at least those reported under SIP 16, the key statement of best practice re pre-packs) is any greater than overall level of misconduct reported by IPs generally. And disqualification proceedings do not, in themselves, lead to any recovery for shareholders. The best they do is create an evidential trail and a correct context for shareholder action.

But what action? And against whom? The shareholder's primary recourse is to get out his bedside copy of the Insolvency Act and look at Sch B1, para 74 and consider whether he can show that the administrator is acting or has acted so as unfairly to harm his interests (whether alone or in common with some or all other members or creditors).

The question is how many shareholders are going to be able to show that prejudice, and how many shareholders have the stomach for the fight, and how many have followed the progress of minority shareholder actions - that have similar concepts - and have lived to tell the tale and want to press on. My experience is not many. Actually I change that - my experience is none. It will be rare indeed for a shareholder to be able to meet the high standard of this section, faced with an administrator who is seeking to act in the best interests of creditors. If he can do that, can he pay the costs?

There may well be a conflict between creditor and shareholder, but the administrator is not going to be criticized without good reason. See the judgment of Mummery LJ in a case styled Four Private Investment Funds [2009] EWCA Civ 514 and arising out of the Lehman collapse:

“If, as they assert and their evidence strongly suggests, the administrators are seeking in good faith to carry out their functions in the interests of LBIE's creditors and asset claimants (as I shall for want of a better expression describe former clients such as the applicants) as a whole and are endeavouring to avoid being deflected from this course by devoting what they fairly regard as a disproportionate amount of time and resources to dealing with requests for information from a particular group of former clients, such as the applicants, I feel quite unable to conclude that any case of unfair harm is established within the meaning of paragraph 74(1). The material for contending that it is simply not to hand.”

If you do a search for the number of times that the section has been invoked, you get a handful of hits, and none of them concern a shareholder's claim. Now it may well be that you will have a better shot of proving your claim if you can demonstrate that SIP 16 has been ignored, but even non-compliance with SIP 16 does not lead to a presumption of prejudice.

Many times the shareholders' remedies against the administrators are the only claims that can be brought despite the desire to go after the former directors, particularly if they are the new directors of Newco. In our particular case, there is still a way because there was a public prospectus issued and so claims can be made on the basis that shareholders were induced to purchase shares on the back of a false document, but in reality you are then going after the directors' insurance policies and you still face an uphill battle because the administrators have all the documents and it is the administrators who really should be taking the initiative. But what administrator will do anything without being paid?

And that leads to the subject of litigation funding, of which more next time.

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