The Aggrieved Creditor: Corporate Recovery, Pre-Packs and what's coming next

Posted On: 17 November 2011

Author: Iain N.J. Artis

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Iain Artis was one of the speakers at Murray Stable's 'Corporate Recovery Today - and Tomorrow' event held in Edinburgh on Thursday 10 November 2011. Below is Iain's paper from that event.

 

CORPORATE RECOVERY, PRE-PACKS and what’s coming next

THE AGGRIEVED CREDITOR

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INTRODUCTION

 

At our last conference, on pre-pack administrations I looked at the darker side of pre-packs, the widely-held suspicion that they are ripe for abuse. We noted that they are not addressed by the Insolvency Act 1986, and I characterised them (I don’t believe too unfairly) as “the obscure regulated by the invisible”.

 In Re Hellas Telecommunications (Luxembourg) II SCA [2010] BCC 295 Lewison J commented:

“It is not entirely easy to see precisely where in the statutory structure the court is concerned with the merits of a pre-pack sale. It seems to me that in general terms the merits of a pre-pack sale are for the administrator to deal with; and the creditors, if sufficiently aggrieved, have a remedy in the course of the administration to challenge an administrator’s decision.”

In Re Kayley Vending Ltd [2009] BCC 578 there was judicial notice of:

“the concern that is a corollary of one of the advantages claimed for the pre-pack. It is said that there may be difficulty obtaining funding in order to enable the administrator to continue to trade whilst he negotiates a sale of the business. If the negotiation process takes place before his appointment, and the business is continuing to trade in that period, there is an obvious risk that credit incurred in that period will not be paid so that the negotiation takes place at the expense of the creditors.”

We noted also that creditors differ in their degree of access to the process by which administration may come about, and in their scope to influence it, in the importance of the sums at stake, in their ability to act quickly, and in their capacities for hope or frustration. Grieving, after all, is an individual thing.

My purpose today it to see what, if anything, has improved for the aggrieved creditor over the last year or so.

 

CONTEXT

Are creditors as a class still aggrieved about pre-packs?

It will be recalled also that para. 3 of Sch. B1 sets out an hierarchy of objectives: first to rescue the company as a going concern; second to achieve a better result for the creditors as a whole than would be likely if the company was wound up without administration; third to realise property for a distribution to one or more secured or preferential creditors. The ordinary creditor arguably comes last in this, at least where the sale is a pre-pack to existing management or shareholders. There is scope for grief.

 In their March 2011 report of the responses to their consultation in 2010 ‘Improving the Transparency of, and Confidence in, Pre-packaged Sales in Administration’ the Insolvency Service noted:-

 “2.2 Broadly, views on the need for change and desirability of the options identified were polarised according to respondent type, with insolvency practitioners, lawyers and regulators advocating that no substantive change be made to the current regime. Respondents representing creditors generally favoured change ……”

Creditors and trade associations representing creditors accounted for over a third of those responding to the consultation.

The majority of respondents felt that there was lacking in the current regulatory framework the necessary level of confidence, and expressed the belief that pre-packs were wholly or partly subject to abuse. Most concerns, particularly from the creditor perspective, related to the scope for ‘phoenixism’. However, there seems to have been little agreement about what could be done, and in particular some respondents, primarily insolvency practitioners and regulators, apparently indicated that an approval mechanism for pre-pack sales involving creditors or the court would be unworkable, and would obviate the benefits of pre-packs. Insolvency practitioners apparently saw the creditor concerns as an issue tied up with SIP 16 compliance.

In terms of the wider economic impact of pre-packs, those respondents broadly in favour of making no change to the current regime, primarily insolvency practitioners, lawyers and regulators, cited the benefits of employment preservation and continued trading opportunities. Those representing creditors cited the consequential financial impact on suppliers, and on competitors from the distortion of market sectors caused by formerly insolvent businesses trading with an unfair competitive advantage.

A theme merging from the report is the difficulty of distinguishing between perception and reality. The professions tend to think that creditors’ difficulty in accepting the framework for pre-packs is one of perception and ignorance, whilst creditors’ bodies maintain that issues of perception should not obscure the reality of the effect in the marketplace. There is also an ethical dimension in the link that emerges in discussions of pre-packs with ‘phoenixism’ and the rules for director disqualifications. Hence perhaps the complaint by creditor respondents that ‘Good’ traders were feeling betrayed by the system.

There seems scope for empirical academic research aimed at confirming, or dispelling once and for all, this ‘perception over reality’ problem.

But, it seems that creditors are still aggrieved.

 

DEVELOPMENTS

SIP 16 Progress, and the prevalence of pre-packs

If the professional view is right that pre-pack problems are mainly issues of transparency and perception, the Insolvency Service report on the operation of SIP 16 to December 2010 will be welcome. It disclosed improved and improving levels of compliance: 75% over the year (formely 62%) and 84% in the second six months. The Service continues to acknowledge that there may be a number of pre-packs flying beneath the radar, however.

(Continued...To read the full paper please click on the link at the top of the page).