Wednesday, 26 May 2010

Insolvency Service - legal action and consultation deadline - Improving the transparency of, and confidence in, pre-packaged sales in administration

Whilst the Insolvency Service (IS - pictured) contemplate an action brought by a disgruntled Cafe owner, they have also recently reminded us that a consultation deadline approaches fast. The "Improving the transparency of, and confidence in, pre-packaged sales in administration" consultation was issued on 31st March 2010. As the IS note, "The development of an effective and efficient policy will be greatly influenced by the quality and quantity of responses. We would welcome your views on whether new measures are needed to strengthen transparency and confidence in the process by which pre-packaged sales are undertaken, and on the form those measures should take." The consultation exercise is ongoing and open to responses until 24th June 2010. The questions are:

  • Question 1: Do you believe that the current framework governing the operation of pre-pack sales in administration provides a sufficient level of confidence that pre-packs are only being used in appropriate circumstances and with an appropriate degree of transparency?
  • Question 2: If not, what are your main concerns with the way pre-packs are currently executed?
  • Question 3: Do you believe that pre-packs are presently subject to abuse? If so, how? Please indicate whether you believe it is the actions of directors, insolvency practitioners, secured lenders or any other parties that are contributing to any perceived or actual abuse and to what extent you believe this is a problem.
  • Question 4: Some of the following options would require a distinction to be drawn between pre-packs and ‘conventional’ administrations. What do you think should be included in a statutory definition as to what constitutes a pre-pack transaction?
  • Question 5: Do you believe that the new pre-appointment cost recovery mechanism will have a significant effect on transparency and confidence?
  • Question 6: Do you believe that by giving statutory force to the SIP 16 disclosure requirements creditors would be given better information about the reasons and justification for the pre-pack?
  • Question 7: Do you believe that such a requirement will increase costs and reduce the returns available to (a) secured creditors, and (b) unsecured creditors? If possible, please provide an estimate of the impact on each.
  • Question 8: Do you believe that it would be appropriate for details of the pre-pack to be filed at Companies House? If not, why not?
  • Question 9: Do you believe that it would be appropriate for a statutory offence to be created in circumstances where the pre-pack disclosure requirements are not adequately met?
  • Question 10: Do you believe that confidence in pre-packs would be improved by requiring companies whose business and assets had been sold through a pre-pack to exit administration via compulsory liquidation? What would be the possible costs and benefits?
  • Question 11: Do you believe that an insolvency practitioner providing advice to a company on the potential for a pre-pack has an inherent conflict of interest when accepting a formal appointment as administrator with a view to subsequently executing a pre-pack sale?
  • Question 12: If so, do you believe that such a conflict extends to circumstances where the insolvency practitioner has had an ongoing prior relationship with the company in the context of undertaking review work for a secured lender?
  • Question 13: Do you believe that a requirement for a different insolvency practitioner to accept appointment as administrator would improve confidence that pre-packs are only used in appropriate circumstances?
  • Question 14: Do you believe the requirement to use two separate insolvency practitioners would increase costs and delay therefore reducing the returns available to (a) secured creditors, and (b) unsecured creditors? If so, please provide an estimate of the impact on each.
  • Question 15: Do you believe the requirement to use two separate insolvency practitioners would reduce the number of business sales effected through a pre-pack sale? If so, please provide an estimation of the impact.
  • Question 16: Is it desirable that unsecured creditors, who may not stand to receive any dividend from the proceedings, be given an opportunity to influence the proposed pre-pack sale where the business is being purchased by a connected party? If so, why?
  • Question 17: Should approval for such a sale initially be sought from unsecured creditors with a recourse to the court, or from the court in the first instance? If you believe unsecured creditors should be given the opportunity to approve in the first instance, what percentage in value of their claims should be required for approval to be obtained?
  • Question 18: Would the prior approval of the court or creditors for the proposed sale improve confidence that pre-packs are only used in appropriate circumstances?
  • Question 19: Do you believe the requirement to obtain court or creditor approval would increase costs and delay therefore reducing the returns available to (a) secured creditors, and (b) unsecured creditors? If so, please provide an estimate of the impact on each.
  • Question 20: Do you believe the requirement to obtain court or creditor approval would reduce the number of business sales effected through a pre-pack sale? If so, please provide an estimation of the impact.
  • Question 21: Do you believe that any provision requiring the prior approval of the court or creditors for business sales to connected parties should be extended to apply to such sales out of all formal insolvency procedures (i.e. not restricted solely to administration)? If so, why?
  • Question 22: Do you believe that a requirement to obtain court or creditor approval for a pre-pack business sale to a connected party should be combined with the attachment of personal liability to directors and connected parties who purchase a business without obtaining the requisite approval?
  • Question 23: Do you believe that it would be appropriate for pre-pack business sales to connected parties executed without the requisite approval to be rendered void?
  • Question 24: To what extent do you believe that pre-packs provide a positive contribution to the wider economy by allowing economically viable parts of insolvent companies to continue trading? How would you quantify such a contribution? Please provide any evidence you may have to support your comments.
  • Question 25: To what extent do you believe that pre-packs create market distortions by allowing companies to ‘dump debts’ and continue trading to the detriment of competitors? How would you quantify this? Please provide any evidence you may have to support your comments.
  • Question 26: To what extent do you believe that pre-packs create job losses ‘upstream’ by allowing companies to ‘dump debts’ and continue trading to the detriment of suppliers who then experience knock-on financial difficulties? How would you quantify this? Please provide any evidence you may have to support your comments.
  • Question 27: To what extent do you believe that any economic value preserved by a pre-pack sale (e.g. employees, customers, suppliers) would otherwise transfer to alternative ventures (e.g. competitors) if a pre-pack sale was not undertaken? Please provide any evidence you may have to support your comments.
  • Question 28: Do you believe that any of the options identified would have a significant impact on the behaviour of secured lenders? If so, what do you think this is likely to be? If possible, please provide an estimation of the impact.
  • Question 29: Which of the five proposed options would be your preferred solution(s), and why?
  • Question 30: Are there any alternative measures that you believe ought to be considered?
  • Question 31: Please provide an indication (if not obvious) as to the nature of your involvement in, or exposure to, pre-pack transactions and the approximate incidence of that involvement or exposure if relevant.

Responses should be sent to Insolvency Practitioner Policy Section of the Insolvency Service, either by email to ippolicy.section@insolvency.gsi.gov.uk or by post to The Insolvency Service, Zone B, 3rd Floor, 21 Bloomsbury Street, London, WC1B 3QW.

Picture Credit: Insolvency Service

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