Why do pre-pack administrations arouse such strong reactions ?
There are a number of possibly strong and valid criticisms of pre-packs, including :-
- Lack of transparency – unsecured creditors often receive no warning of administration or that the directors of the company that owes them money will shortly take over as new company taking all of the assets but not the liabilities
- Accountability – Many people are astonished to find out that the Insolvency Act does not deal with pre-pack administrations and consequently administrators do not require approval from the court or unsecured creditors.
- No benefits for creditors – pre-packs could perhaps at least be partially justified if there was clear evidence that buyers of assets, whether the directors who have just left a mess and unpaid creditors or not, generally pay more than would be the case without a buyer for assets and attempting to rejuvenate the business. Whilst each case is unique there seems to be little if any evidence that a pre-pack assists unsecured creditors.
- Asset stripping – little more needs to be said but with the added ingredient of the asset strippers being the same people that were involved in a failed company which may owe significant sums to innocent third parties.
- Conflict of interest – the proposed administrator has an inherent conflict of interest.
Are there any benefits with pre-pack administrations ?
Clearly, there are likely to be benefits for the buyer, but in objective terms, regardless of the identity of the buyer, benefits might include :-
- quicker and more orderly transfer of the business.
- minimising damage to supplier, customer and employee confidence.
- possibly saving jobs.
- faster returns for creditors – whilst returns may still be far from ideal, minimal or even non-existent after fees and secured creditors are paid, the process is generally much quicker than a long drawn out administration.
What are the risks of a pre-pack ?
Clearly, with many situations like this, the creditors are going to be very angry, feeling that they have had salt rubbed in their wounds. They may well at least contemplate taking action to fight back. One possible, although difficult route that creditors may explore relates to section 214 of the Insolvency Act 1986 Act which imposes personal liability on directors for wrongful trading. In order to protect their position, directors of an insolvent business would be well advised to make an early decision if it appears that the company is in difficulty and to have documented external legal and/or accountancy/insolvency professional advice to protect their position. It is also very important for directors to take into consideration the issue of any defined benefit pension scheme. If a company is considered to have taken the pre-pack route as a way of avoiding obligations in a pension scheme liability the Pensions Regulator has power to impose personal liability on the directors of the insolvent company.
Do unsecured creditors have any rights to challenge pre-packs ?
Yes, creditors do have the right to make a challenge but ought to be careful as any challenge is difficult legally and inherently expensive. Creditors are likely to be very angry in these situations, which means it is even more important to obtain dispassionate, level headed and experienced advice.