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Administrator conflicts in pre-packs

8 Mar 2018

 

Readers will be familiar with pre-packs – putting a company into administration and immediately selling the business/assets in a sale that was arranged before the company entered administration.

 

Pre-packs are often fraught with angry and suspicious creditors – often caused by the fact that the buyer is usually a newco formed by the defunct company’s management.

 

In the recent case of VE Vegas Investors IV LLC and others v Shinners and others, VE was in difficulties and sought advice from a firm of IPs.  It then went on to appoint them to conduct a pre-pack.  The IPs were not provided with clear information on the finances and the assets from VE.  Ultimately, only one purchaser – the stereotypical newco – was identified by the time the IPs were as administrators appointed by the court.  Crucially, the IPs did not disclose the problems they were having with VE.

 

After their appointment, the administrators sold the assets to newco.

 

VE’s creditors then brought proceedings to remove the administrators on the basis that there was a conflict of interest and a breach of duty to creditors in respect of the pre-pack.  The court has the power to remove an administrator, conferred on it by paragraph 88 Schedule B1 Insolvency Act 1986, but ultimately, five days into the trial, the administrators resigned.

 

The administrators contested this application for the first five days of a six-day hearing. At the end of the fifth day the administrators purported to resign by giving notice in writing to the court under paragraph 87 Schedule B1.  The administrators purported to give eight days’ notice (the minimum being five).  The administrators also asked the court to abridge the notice of resignation to give immediate effect to end the proceedings.

 

The court declined, and instead used its own power to remove the administrators immediately.  It considered that not only was this in the best interests of the creditors, but that it was also in the public interest in that the public needed to have confidence in insolvency regimes.

 

Whilst no finding was made specifically about the pre-pack, it was held that there was a conflict of interest in that the administrators were prevented from effectively investigating the pre-pack by VE at the expense of creditors, and that the administrators should have raised this point.

 

Those that oppose pre-packs will no doubt welcome this decision.  However what is key to IPs is that they follow the requirements of SIP 16, which look to have been ignored in this case.  Whilst this is somewhat old news, what this case will no doubt do is add resolve to disgruntled creditors in taking actions against office holders.

 

Strictly interpreting this decision specifically in respect of the conflict of interest point, IPs who carry out pre-appointment work on pre-packs will seemingly be conflicted from taking the appointment.  However, the way around this may be to ensure you are retained by oldco for pre-appointment work, not the directors, and to properly define the scope of that retainer and only work within that scope.

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Short Richardson and Forth Solicitors Limited is a private limited company registered in England and Wales under company number 10572065, authorised and regulated by the Solicitors Regulation Authority No 637150.

Short Richardson and Forth Solicitors Limited is a private limited company constituted and run in accordance with the provisions of the Companies Act 2006. The term “partner” has been used to denote individual senior solicitors employed by Short Richardson and Forth Solicitors Limited.