Caging the Phoenix - tightening the controls on pre-packs
This article was included in the spring 2011 issue of Informer - the real estate newsletter.
The last few years have seen a rapid growth in the use of pre-packaged administrations (pre-packs). These are used where a failing company has lined up a the sale of all or, more usually, the profitable parts of its business by its administrator immediately after falling into administration. Such deals are inherently secretive and there is seldom any hard information available to show that the price paid was appropriate, as there is usually no prior marketing. When the buyer is connected to the failing company, it is natural to question if a proper price was paid or if the creditors have just been "taken for a ride".
The Government has decided that the code of practice brought in by the UK's insolvency practitioners (Statement of Insolvency Practice 16) is not sufficient. Under the current arrangement, an administrator is obliged to put together a report, after the event, with the following information:
- detailing why a pre-pack administration was believed to be appropriate; and
- setting out in this report sufficient details for the company's creditors so that they can be satisfied they have not been disadvantaged.
This after-the-event reporting regime has failed to allay the fears of creditors in particular where the purchasing party is connected to the company in administration - so called "Phoenix" companies.
To address the problem, the Government announced on 31 March 2011 a proposal that where a company in administration is proposing to dispose of a significant part of its assets of to a connected party, and where these assets have not been overtly marketed, the sale would only be permitted after a suitable notice period expires. The current proposal is for a three day notice window.
Not unsurprisingly, this has polarised the opposing sides with R3, a representative body of administrators, claiming this is too long and that three days could kill any chance of a sale as a going concern. Whereas the British Property Federation, which represents landlords’ interests, is looking at a window of at least seven days.
Given that we seem to be in a second wave of pre-packs and CVAs, and with pre-packs to connected parties currently running at approximately 40%, the proposed notice regime looks to be something which will be the subject of intensive lobbying as the proposal starts to be fleshed out.