Memorandum submitted by the Insolvency
Practitioners Association (IPA)
1. SUMMARY
The IPA is of the view that The Insolvency Service
has generally discharged its wide ranging insolvency functions
efficiently and effectively, and has shown itself capable of managing
the marked increases in bankruptcies in the last five years. However,
with the likelihood of significant further increases in bankruptcies
and also now in companies, it would be appropriate to look at
a number of issues which need, or will soon need, to be addressed—
— Para 3.3: The Service should make
more use of the Secretary of State's powers to appoint insolvency
practitioners as trustees and liquidators to ensure that its official
receivers continue to be able to deal with the essential protection
of assets and the investigation of conduct of bankrupts and directors
of failed companies.
— Para 3.5: It is important that The
Service's investigation and enforcement activities are maintained,
and not arbitrarily restricted by reductions in its budget.
— Para 4.3: Advice organisations and
others providing debt advice should be required to provide debtors
with information and appropriate advice across the range of statutory
and non-statutory debt relief and repayment solutions, as is currently
required of insolvency practitioners.
— Paras 4.4 and 4.5: Officials receivers,
in the event that it is decided that they should accept petitions
for bankruptcy, should establish whether debtors have received
professional advice, particularly in cases where they file their
petitions on-line.
— Paras 4.5, 4.6 and 4.7: Bankruptcy
should be a last resort; and debtors who can pay should be directed
to alternative solutions likely to have less impact on their credit
rating and improve their access to financial markets, and enhance
returns to creditors.
— Para 4.6: The Government should ensure
that debtors are not being unreasonably denied access to debt
relief and repayment procedures.
— Para 4.8: The Service should have
responsibility for the proposed approval of debt management scheme
providers to ensure coherence and consistency with the authorisation
and regulation of insolvency practitioners and approval of debt
relief order intermediaries, and with other debt repayment procedures.
— Paras 5.10 and 5.11: Transparency
in pre-packaged administration sales of companies should not be
overshadowed by particular interests' preferences for confidentiality.
— Para 6.6: If The Service is to continue
to license insolvency practitioners, then it should have the full
range of sanctions to deal with transgressions and misconduct.
— Para 6.7: The Service should take
a more outward-looking role in assuring the integrity and robustness
of the regulatory framework.
2. ABOUT THE
IPA
The IPA is a membership body for those in insolvency
practice, those engaged in insolvency related work and those with
an interest in insolvency.
— It has some 1,700 individual and
firm members and students.
— It is the second largest of the professional
bodies recognised for the purpose of authorising and regulating
insolvency practitioners (IPs) under the Insolvency Act 1986.
— As the only recognised body solely
involved in insolvency, it has been at the forefront in developing
professional and ethical standards; widening access to insolvency
knowledge and understanding; and promoting the principles of better
regulation.
— It introduced what has become the
Joint Insolvency Examination which is the required qualification
for IPs; and has developed an intermediate Certificate of Proficiency
in Insolvency and Certificate of Proficiency in Personal Insolvency
Examinations, primarily for those involved in case administration.
— It jointly administers a voluntary
scheme for the registration and regulation of those specialising
in fixed charge receiverships which fall outside the statutory
framework.
— It has been instrumental in establishing
the Debt Resolution Forum which will set, monitor and regulate
standards for those involved in providing non-statutory debt solutions.
3. INSOLVENCY
SERVICE CASE
LOADS
3.1 The announcement of the Committee's
scrutiny refers to "insolvencies increasing at an alarming
rate and the appropriateness of looking at The Insolvency Service's
efficiency". Such an increase has yet to be fully reflected
in the latest published statistics to 30 September 2008. However,
there remains a broad consensus amongst commentators, re-enforced
by reports of more large, medium and small businesses facing falling
sales and tighter provision of finance, along with some high profile
companies entering into administration, that numbers of insolvencies
will increase significantly over the coming months.
3.2 The Service's financial regime gives
it flexibility to deal with fluctuations in case administration
workloads from one year to another by adjusting resources in line
with cases and the fees that they generate. But it is acknowledged
in the Corporate Plan 2008-11, published in April 2008, that the
effort needed to be put into training and development of new staff
to handle the expected increase in case numbers from 67,200 in
2007-08 to a then projected 74,200 in 2008-09 would mean that
The Service would be stretched very hard to maintain its performance.
The numbers of bankruptcies can expect to be affected when the
provisions of the Tribunals Courts & Enforcement Act 2007
relating to debt relief orders are brought into operation in April
2009—it is estimated in the Corporate Plan that some 8,000
debtors who might otherwise have been expected to present their
own petition for bankruptcy would qualify for a debt relief order
on the basis that their liabilities do not exceed £15,000
and they have minimal assets and limited surplus income. But rising
unemployment may result in debtors defaulting on individual voluntary
arrangements (IVAs) and resorting to bankruptcy; and there could
be fewer IVAs proposed as alternatives to bankruptcy without some
changes to the approach to IVAs—see Personal Insolvency
at paras 4.6 and 4.7.
3.3 With the likely rise in insolvencies
and the question about The Service's ability and capacity to recruit
and train sufficient numbers of additional staff, the IPA considers
that it should look again at the use it makes, and considers making
more use, of the powers of the Secretary of State to appoint IPs
as trustees and liquidators to ensure that the role of its official
receivers and their staff in the essential protection of assets
and the investigation of conduct is not adversely affected by
the need to themselves also undertake the trustee and liquidator
functions where there are assets—currently IPs are appointed
in some 9% of bankruptcies and 21% of compulsory liquidations.
Otherwise, there is a distinct risk that case administrations
standards will fall and/or investigations will be curtailed, undermining
the credibility of the framework for dealing with financial failure.
3.4 Would the private sector be able to
cope any better? While large and medium firms are heavily committed
to some major failures, they are generally in a position to re-allocate
resources from other departments whose workloads have historically
reduced as the economy has shrunk. The number of smaller firms
across the country would offer more flexibility to spread case
work.
3.5 There would be a further concern if,
as a consequence of pressures on government spending, The Service's
investigation and enforcement functions, which are funded by the
Department of Business Enterprise & Regulatory Reform under
a programme budget, were to be arbitrarily restricted by reductions
in that budget: it might be reasonably predicted that if the number
of insolvencies do rise, then there will be a need for an increase
in investigation and enforcement—in actual numbers if not
necessarily proportionately. It would be damaging to the integrity
of the insolvency system if bankrupts and directors who had acted
irresponsibly, recklessly or dishonestly in bringing about their
own or their company's insolvency were to escape detailed scrutiny,
and appropriate sanctions.
3.6 The Committee should be aware that in
December 2006 The Service had to announce that, as a result of
the then Department of Trade & Industry having suffered some
unforeseen demands on its budgets in 2006-07 and being required
to cut expenditure on some of its activities, its enforcement
budget had been reduced by 7.5%: in consequence it was unable
to investigate as many cases as it had originally planned. It
is understood that the budget was re-instated for 2007-08, but
a shorter term impact seems to have been that The Service fell
short of its target for increasing its enforcement outcomes in
2007-08.
4. PERSONAL INSOLVENCY
4.1 The Government, principally through
The Insolvency Service and the Ministry of Justice, is taking
forward proposals to provide individuals facing financial difficulties
with a wider range of statutory debt relief and repayment solutions,
alongside the many non-statutory solutions—see Appendix
I.
4.2 The concepts behind the statutory proposals
are straightforward, depending very largely on the ability of
debtors to pay (and their readiness to do so) and how much they
owe—see Appendix II. Bankruptcy should be the last resort,
essentially for those whose affairs should be investigated by
the official receiver: other debtors should be channelled into
one of the other relief/repayment solutions.
4.3 From the perspective of most debtors
however, the statutory and non-statutory options and the impact
on them are likely to seem somewhat bewildering: independent,
authoritative advice is essential. There is an existing requirement
on IPs consulted by debtors to ensure that they receive information
and appropriate advice across the range of statutory and non-statutory
solutions; and to record the conclusions. While it appears from
responses to surveys conducted for or by The Service in 2005 and
2007 that the majority of debtors who presented their own petition
for bankruptcy had considered other solutions and sought advice,
the extent of that consideration and the validity of the advice
are unclear. The IPA considers that the requirement placed on
IPs should also be extended to advice organisations and others
providing debt advice. Such a requirement would be supported by
the publication of a Debtor's Guide which is being finalised by
a Standing Committee, chaired by The Service and including representatives
of the insolvency profession and regulatory bodies, creditors,
Citizens Advice and other advice organisations, the Office of
Fair Trading and the Insolvency Practices Council which represents
the public interest in insolvency profession standards: the Guide
outlines the debt solutions available to debtors and identifies
the criteria for them and their effect on debtors.
4.4 In October 2007, The Service published
a proposal under which debtors would file their petition for bankruptcy
with its official receivers, rather than as now with the courts.
The proposal would present an opportunity for The Service to take
a more proactive and innovative role in steering debtors to the
appropriate solution. For example:
— There already exists a provision
by which, in relation to a debtor presenting his own petition
and who has assets and/or income, the court can refer him to an
IP with a view to proposing an IVA. The procedure has fallen into
disuse in the hands of the court; and in consequence, debtors
are being made bankrupt when a more appropriate solution might
have been more fully considered.
— While in 2007-08 some 13,000 bankrupts
(out of 62,000) were subject to agreements/orders to make payments
out of their surplus income for periods of up to three years,
only 13 attempted a post-bankruptcy fast track voluntary arrangement
(FTVA) under the aegis of official receivers—something which
would immediately lead to the annulment of their bankruptcy; should
have less impact on their credit rating and improve their access
to financial markets; and should enhance returns to creditors.
4.5 The Service response to comments on
the consultation, published in July 2008, suggests that it might
see itself more as "a safety net" rather than a primary
source of advice. That is probably right. But the IPA considers
that official receivers should establish whether debtors petitioning
for their own bankruptcy have had information about the options
available to them and have received professional advice—particularly
in cases where the debtor files his petition on-line; and in appropriate
cases, refer debtors to an insolvency practitioner or to a recognised
advice organisation for that advice and further consideration
of the options, including an IVA.
4.6 A debtor cannot be compelled to put
forward a proposal for an IVA; nor can creditors be compelled
to accept. That suggests:
— Consideration might be given to introducing
a scheme with elements of the US Chapter13 procedure by which
a debtor who has surplus income can only proceed under protection
of the Bankruptcy Code through a repayment plan, usually for five
years—around 40% of US Bankruptcy Code filings proceed under
Chapter 13.
— Alternatively or additionally, the
period of income payments orders/agreements entered into by bankrupts
should be extended from three years to five years to align the
procedure with (i) the proposed payment period for county court
administration orders and (ii) the usual payment period for IVAs;
and provide more incentive to "can pay" debtors to come
to some arrangement with their creditors outside bankruptcy, and
improve returns to creditors.
— It would be appropriate to revive
the proposal contained in the recently withdrawn draft Legislative
Reform Order by which a voluntary arrangement proposal could be
approved by a simple majority in value of creditors (rather than
as now, 75%), thereby reducing the risk of a minority creditor
owed as little as 25% of the amount due to creditors who vote
(and perhaps even a smaller percentage of the total amount owed)
being able to defeat a proposal which would benefit the vast majority.
— Given the difficulties which debtors
have encountered with creditors, particularly banks, putting forward
unnecessary or inconsistent modifications to proposals for IVAs
and imposing restrictive pre-conditions, the Government should
ensure that debtors are not being unreasonably denied access to
debt relief and repayment procedures.
4.7 The IPA considers that to deliver its
objective of supporting a fresh start for bankrupts by providing
an accessible alternative to bankruptcy, The Service gives early
attention to:
— removing unnecessary internal restrictions
to FTVAs which seem largely to be matters of its administrative
convenience rather than reflecting the interests of bankrupts
and creditors;
— exploring mechanisms by which IPs
with experience of handling more complex IVAs could be appointed
as supervisors of FTVAs, or alternatively encouraging such bankrupts
to proceed under a non-FTVA post-bankruptcy proposal with an IP;
and
— pursuing the recommendation in the
Enterprise Act Personal Insolvency Evaluation Report, published
in November 2007, that it work with credit reference agencies
and lenders to ensure that FTVAs and post-bankruptcy IVAs are
appropriately reflected in lender policies, and are therefore
more attractive to "can pay" debtors.
4.8 It is noted that the Ministry of Justice
has formulated proposals for approval of debt management scheme
providers under powers in the Tribunals Courts & Enforcement
Act 2007. So far as it is possible to establish, the intention
is that scheme providers would be able to offer debt repayment
plans which would mirror county court administration orders—that
is, based wholly on income without any recourse to the debtor's
assets; imposed on creditors with a limit on payments of five
years, and therefore invariably involving write-off of part of
their debts; and with fixed percentage fees—but would be
administered by the private sector. It is unclear how the proposals
sit alongside IVAs; or indeed, whether there is yet established
a need for such schemes. While, as noted, the origins lie in the
county court administration order procedure administered by the
courts, the IPA submits that the proposals should be taken forward
with The Service in the lead to ensure coherence and consistency
with the requirements for authorisation and regulation of IPs
and approval of intermediaries appointed to assist debtors submitting
applications for debt relief orders; and with other debt repayment
procedures for which it is responsible.
5. COMPANY INSOLVENCY—ADMINISTRATION
5.1 The administration procedure was introduced
by the Insolvency Act 1986 to provide companies (and by addition
in 1994, partnerships) facing financial difficulties with a breathing
space to re-structure their business and funding.
5.2 Amendments introduced by the Enterprise
Act 2002, covering administrations and administrative receiverships
and aimed at creating a fairer system for creditors generally,
re-stated the administration objectives as first rescuing the
company as a going concern; or if that was not reasonably practicable,
achieving a better result for the company's creditors as a whole;
or if that was not reasonably practicable, realising property
to make a distribution to one or more secured or preferential
creditors. At the same time, the requirement to apply to the court
for an administrator was removed, thereby reducing the costs and
delay involved in obtaining an appointment and making the procedure
more accessible to smaller companies.
5.3 Since the amendments made by the Enterprise
Act 2002, the numbers of administrations (England & Wales)
have increased significantly—from 643 in 2002 to 2,512 in
2007 and 2,804 in the first nine months of 2008, representing
some 19% of company insolvencies.
5.4 Research undertaken for The Insolvency
Service and reproduced in its Enterprise Act 2002 Corporate Insolvency
Provisions Evaluation Report, published in January 2008, shows
that within a sample of administrations commenced in 2001-04,
41% resulted in the rescue of the whole or part of the company
or a going concern sale of the whole or part of the business;
while 56% resulted in the sale of the company's assets on a break-up
basis (and 3% were ongoing at the time of the research)—reflecting,
it would seem, the range of objectives for which administration
was designed. What has to be recognised however is that there
has been a very significant shift in the economic climate since
those companies went into administration; and that would suggest
that it would be appropriate to put in place procedures to more
immediately track the outcomes of new administrations.
5.5 It is also appropriate to make the point
here that many company rescues are achieved without recourse to
statutory procedures, involving re-structuring of share capital,
re-financing of day to day operations and/or re-scheduling supply
and delivery arrangements and debts. Indeed, it is likely that
they exceed the number/value of formal rescues through administration
(or company voluntary arrangements). Thus those companies, or
certainly the larger ones, resorting to administration are frequently
those where informal negotiations have been unsuccessful and they
cannot (or should not) continue trading outside a formal insolvency
mechanism; but where it is nevertheless worthwhile exploring further
the possibility of securing a sale of all or part of the company
or its business, rather than automatically resorting to liquidation
and break-up sale. It might be added that the vast majority of
companies which go into liquidation are not rescuable because
of loss of market or of underlying unprofitability, and generally
directors act too late to save them. Greater use of administration
and publicity surrounding it might increase awareness and provide
encouragement to directors to seek advice at an earlier stage
when their company's business, or parts of it, might be capable
of being turned round to solvency and profitability.
PRE-PACKAGED
ADMINISTRATIONS
5.6 There has been considerable discussion
recently about the appropriateness and propriety of "pre-pack"
administration whereby arrangements for the sale of the company
or all or parts of its business are put in place immediately before
the appointment of an administrator who then completes the sale
on or shortly after his formal appointment. A "pre-pack"
may offer the best chance for a business rescue, preserving goodwill
and jobs and retaining key staff, maintaining profitable contracts
and avoiding the worst effects of adverse publicity; or simply
it may be that the company has run out of cash and cannot continue
trading to wait on possible offers from third parties. But the
"pre-pack" practice has attracted criticism where the
sale is made to some or all of the directors even though, and
particularly in the current economic climate and market conditions,
they may be the only parties prepared to offer better than break-up
value.
5.7 The legislation contains a number of
provisions to safeguard the interests of creditors—see Appendix
III. But perhaps of at least as much importance is the provision
of information about dealings with a company's business and assets,
particularly where they involve the directors or connected or
associated individuals or companies.
5.8 The licensing bodies have recently adopted
a mandatory Statement of Insolvency Practice on "pre-packs"
(SIP16—November 2008). The SIP requires that IPs should
keep a detailed record of the reasoning behind a decision to proceed
to disposal of the company and its assets through a "pre-pack"
sale; and that creditors are provided with a detailed explanation
and justification of why a "pre-pack" sale was undertaken—see
Appendix IV.
5.9 Additionally, the new Code of Ethics,
which came into force on 1 January 2009 and applies to all IPs,
re-iterates their obligations to comply with principles of integrity;
objectivity; professional competence and due care; and professional
behaviour.
5.10 The IPA itself has placed particular
emphasis on transparency in additional guidance which it has given
its licence holders on the Code provisions, and which it believes
to be of fundamental importance: "It is imperative that all
members ensure that, except where to do so would conflict with
any legal or professional obligation, their acts, dealings and
decision making processes are transparent, understandable and
readily identifiable ... particularly ... where the assets and
business of an insolvent company are sold shortly after appointment
on pre-agreed terms... [and where] ... creditors at large are
not given the opportunity to consider the sale of the business
or assets before it takes place".
5.11 The IPA was concerned that the need
for transparency, not least in relation to "pre-packs",
should not be overshadowed by any duty of confidentiality to the
parties to the transaction. The additional guidance therefore
makes clear the distinction between a member acting as adviser
to a company or its directors, where the principle of confidentiality
may arise; and acting as a statutory office holder, where a client/professional
relationship will not arise. It believes that that does need to
be re-enforced with the profession as a whole by the RPBs and
by The Service.
RESCUING BUSINESSES—UK
ADMINISTRATION V
US CHAPTER 11
5.12 There has been some discussion in the
media and elsewhere whether the UK should move its administration
procedure more towards the United States Chapter 11 for the purpose
of rescuing businesses.
5.13 UK administration is distinguishable
from US Chapter 11 in one important aspect—in the UK an
IP is appointed to take control of the company, the powers of
the directors cease and it is for the IP to formulate the detailed
proposals for the rescue of the company; whereas in the US the
directors invariably remain in office whilst a plan is formulated
and negotiated with the various creditor and stockholder groups
for presentation to the court: indeed, the court may have to consider
competing plans submitted by creditors.
5.14 While the US process would seem to
ensure the involvement of creditors and shareholders, frequently
through committees separately of unsecured creditors, secured
creditors, employees, bondholders and stockholders, that is inclined
in larger cases to result in legal actions which may be complex,
lengthy and costly and have to be borne from the assets which
might otherwise be available for creditors generally; and, unless
there is ready unanimity, means that Chapter 11 is impractical
for many small and medium size companies.
5.15 Chapter 11 also recognises the priority
rights of those who fund the company's business under a re-organisation
plan—something which may facilitate a continuation of the
business, but which may be at the expense of the unsecured creditors.
5.16 The most recent statistics show that
there were 5,900 Chapter 11 filings in the US fiscal year 2007,
representing some 20% of total business filings—comparable
with the usage of the administration procedure here of 19%. It
has not been possible to identify any recent research into outcomes;
but a study by the Executive Office of the US Trustees some years
ago suggested that re-organisation plans were confirmed in around
30% of filings. Without more recent data, it is not possible to
say whether Chapter 11 does work and whether it or parts of it
might, with advantage, be imported into UK legislation.
6. REGULATION
6.1 Licensing of insolvency practitioners
(IPs) was introduced by the Insolvency Act 1986. IPs may be licensed
by The Insolvency Service on behalf of the Secretary of State
or by professional bodies recognised by the Secretary of State.
There are seven such recognised professional bodies (RPBs), including
the IPA which licenses 465 IPs (out of a total of 1,680).
6.2 The statutory basis of recognition is
that the body enforces rules for ensuring that its members who
are licensed are fit and proper persons to act as IPs and meet
acceptable requirements as to education and practical training
and experience.
6.3 Why have seven RPBs, together with The
Service, regulating 1,680 IPs? That mirrors what was in place
at the time in relation to auditors under the Companies Acts 1948
& 1976 which provided for authorisation by four accounting
bodies or by the Secretary of State; and it reflected, and continues
to reflect, the fact that many of those who are licensed as IPs
also undertake other work which is subject to oversight and regulation
by their professional body.
6.4 How can consistency in the regulation
of IPs be assured through eight regulators?
— The RPBs are subject to agreement
entered into with The Service as a condition of recognition in
the form of recently reviewed and updated Memorandum of Understanding
and Principles of Monitoring which set out detailed provisions
relating to granting licences, ethics and professional standards,
monitoring and inspecting IPs, dealing with complaints and disciplinary
matters.
— The RPBs, with The Service, agree
common Statements of Insolvency Practice, a Code of Ethics and
Insolvency Guidance Papers through their Joint Insolvency Committee.
— The Service requires annual reports
from the RPBs in relation to monitoring and inspection and disciplinary
action taken.
— The Service conducts its own inspections
of RPBs' systems and procedures at least once every three years,
and can call for information and documentation relating to individual
IPs and individual cases at any time.
— The Service has carried out a detailed
comparative study of disciplinary measures taken by the RPBs in
relation to IPs' transgressions and misconduct, published in October
2006, and found them to be broadly consistent.
It should be added that no evidence has been submitted
by critics of the framework of any adverse impact—for creditors
or insolvents or others—arising from having eight regulators.
6.5 Is there an incompatibility in The Service's
role as regulator of regulators and in itself licensing IPs? The
provision by which The Service has power to grant licences was
originally envisaged to be limited to "grandfathering in"
those individuals who had acted for some years as IPs but were
not, and did not wish to become, members of one of the RPBs. It
has continued to exercise the power in relation to new entrants
to the insolvency profession who choose to be licensed by it.
An advantage of it doing so might be said to be that it thereby
has direct experience of IP procedures and practices and of their
monitoring, inspection and regulation which it can bring to bear
to more effect in discussions with the RPBs about standards. There
is left at large a question raised in the context of Better Regulation
Executive Review of The Service's Regulatory Performance as to
whether The Service might press forward improvements in standards
and expedition of implementation as regulator of regulators to
the extent only that they suit it as regulator of IPs and how
it goes about regulating them: the Review might elaborate on that
(or dismiss it) when it is published.
6.6 One other aspect which does give rise
to concern is The Service's sanctions against the IPs which it
licenses—limited to removal of the licence and only where
the IP is found to be no longer be fit and proper. All the RPBs
have a range of sanctions from warnings/reprimands through fines
(with costs) to restrictions where an IP's transgressions fall
short of making him no longer fit and proper; and have provisions
for publishing their findings. Doubtless The Service is able to
impose conditions and restrictions administratively; but none
are published on an individual case basis or reported in its Annual
Report. That there are differences between the RPBs and The Service
may in practice be more a matter of perception than reality—except
to the extent that its IPs are not liable to fines and costs,
and publicity (although there is no evidence of regulatory arbitrage:
that is, no evidence that IPs have sought to move to The Service
to avoid the risk of fines and costs, and publicity). But at least
a perception remains that IPs licensed by The Service are not
as rigorously regulated; and that can undermine confidence in
the regulatory framework and The Service's role in it. The IPA
considers that if The Service is to retain its power to license
IPs, then it should have the full range of sanctions to deal with,
and to be seen to deal with, transgressions and misconduct.
6.7 It is important that what goes on in
relation to the regulation of IPs is not internalised and that
regulators are seen to respond positively and quickly to emerging
issues; otherwise, there may be misunderstanding, misconception
and misapprehension about how regulation works, and whether regulation
works. The IPA considers that The Service should take a more outward-looking
role in assuring the integrity and robustness of the regulatory
framework and its responsiveness, for example:
— provide fuller reports of the discharge
of its functions as both regulator of regulators and as regulator
of IPs—its Annual Reports are descriptive of activities
but not of outcomes;
— look to further improve the working
of regulation by discussions with the RPBs and with other stakeholders
about its findings from RPB inspections and complaints referred
to it;
— generally inform and provide a more
transparent view of how regulation works, and demonstrate the
coherence, consistency and effectiveness of the framework across
the insolvency profession.
APPENDIX 1
APPENDIX 2
APPENDIX 3
COMPANY ADMINISTRATION: "PRE-PACK"
LEGISLATIVE SAFEGUARDS
1. First, the administrator's powers include
the power to sell or otherwise dispose of the property of the
company by public auction or private auction or private contract;
and where the circumstances warrant it, he may do so without the
prior approval of the creditors. But he is required to do so "in
the interests of the company's creditors as a whole" or otherwise
avoid "unnecessary harm [to] the interests of the creditors
of the company as a whole"
2. Secondly, an administrator is an officer
of the court for the purpose of carrying out his functions; is
bound by case law to act honourably and fairly; and is accountable
to the court for the performance of his functions.
3. Thirdly, the company or its directors
are required to give at least five business days' notice of the
intention to appoint an administrator to the company's bank or
other lender which holds what is termed a fixed and floating charge
on the company's assets; and the bank or other lender, if not
content with the administration to proceed under the control of
the insolvency practitioner nominated by the company or its directors,
can appoint an insolvency practitioner of its own choice or apply
to the court to restrain proceeding with the administration if
it is of the view that it is inappropriate or for an improper
purpose.
4. Fourthly, the administrator is required
as soon as reasonably practicable to advertise his appointment
and send notice of his appointment to the company's creditors;
to hold a meeting of creditors—unless the company has sufficient
assets to pay its creditors in full, or it has insufficient assets
to enable any payment to be made to unsecured creditors, or the
objective is to realise property to make a distribution to one
or more secured or preferential creditors; and where a meeting
of creditors is required to be held, to obtain creditors' approval
of his proposals—failing which the court may amongst other
things end his appointment.
5. Finally, any creditor can apply to the
court where it considers that the administrator has acted or is
proposing to act so as unfairly to harm its interests; and the
court may amongst other things regulate the administrator's exercise
of his functions and/or require him to do or not do specified
things and/or examine his conduct which may result in an order
that he repay, restore or account for the company's assets and/or
contribute to the company's assets by way of compensation for
breach of duty or misfeasance.
6. SIP16 also picks up concerns where for
example a supplier has delivered goods after the insolvency practitioner
has been engaged by the company to review its financial position
but before his formal appointment, and remains unpaid at the time
the company enters administration. It makes it clear that insolvency
practitioners have to be mindful of the potential liability attaching
to those who are a party to a decision to cause the company to
incur credit when they knew or should have known that there was
no reason to believe that it would be repaid.
APPENDIX IV
COMPANY ADMINISTRATIONS—"PRE-PACKS"
EXTRACT FORM STATEMENT OF INSOLVENCY PRACTICE
16—NOVEMBER 2008
The following information should be disclosed
to creditors in all cases where there is a pre-packaged sale,
as far as the administrator is aware after making appropriate
enquiries:
— The source of the administrator's
initial introduction.
— The extent of the administrator's
involvement prior to appointment.
— Any marketing activities conducted
by the company and/or the administrator.
— Any valuations obtained of the business
or the underlying assets.
— The alternative courses of action
that were considered by the administrator, with an explanation
of possible financial outcomes.
— Why it was not appropriate to trade
the business, and offer it for sale as a going concern, during
the administration.
— Details of requests made to potential
funders to fund working capital requirements.
— Whether efforts were made to consult
with major creditors.
— The date of the transaction.
— Details of the assets involved and
the nature of the transaction.
— The consideration for the transaction,
terms of payment, and any condition of the contract that could
materially affect the consideration.
— If the sale is part of a wider transaction,
a description of the other aspects of the transaction.
— The identity of the purchaser.
— Any connection between the purchaser
and the directors, shareholders or secured creditors of the company.
— The names of any directors, or former
directors, of the company who are involved in the management or
ownership of the purchaser, or of any other entity into which
any of the assets are transferred.
— Whether any directors had given guarantees
for amounts due from the company to a prior financier, and whether
that financier is financing the new business.
— Any options, buy-back arrangements
or similar conditions attached to the contract of sale.
This information should be provided in all cases
unless there are exceptional circumstances, and if this is the
case, the reason why the information is not provided should be
stated. If the sale is to a connected party it is unlikely that
considerations of commercial confidentiality would outweigh the
need for creditors to be provided with this information.
Unless it is impracticable to do so, this information
should be provided with the first notification to creditors. In
any case where a pre-packaged sale has been undertaken, the administrator
should hold the initial creditors' meeting as soon as possible
after his appointment. Where no initial creditors' meeting is
to be held and it is impracticable to provide the information
in the first notification to creditors it should be provided in
the statement of proposals of the administrator which should be
sent as soon as practicable after his appointment.
December 2008
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