In the United Kingdom a ‘pre-pack’ is an arranged deal where a sale of the assets of an insolvent company (or a part thereof) is arranged before it enters into a formal administration procedure and the sale is executed by the administrator on or shortly after his or her appointment. Since some two years a majority of Dutch courts are prepared to assist in processing ‘pre-packs’ in cases such as Schoenenreus (chain of shoe shops) and lingerie manufacturer Marlies Dekkers. It follows that developments in England will be of interest for the Netherlands. Mid June 2014, the British Government published the findings and recommendations of an independent review into pre-pack administrations (‘pre-packs’), carried out by Teresa Graham CBE.
According to the report, on the positive side a pre-pack: (i) can preserve jobs; (ii) can be cheaper than formal insolvency proceedings (such as a scheme of arrangement); (iii) may well succeed where a purchaser pays for the business over a period of time, rather than on the date of the purchase, and finally (iv) may be advantageous to the UK economy. Overseas companies may seek to move their ‘centre of main interests’ (COMI) to the UK in order to avail themselves of the flexible restructuring, insolvency and company legislation in the UK (‘These relocations are a source of inward investment to the UK and should be perceived as a positive advantage to the economy.’).
The report also notes the downsides of a pre-pack, such as (i) pre-packs lack transparency before the sale as the parties work to secure the future of the business without risking the confidence of creditors, customers and employees, (ii) marketing of pre-pack companies for sale is insufficient, (iii) more must be done to explain the valuation methodology, and (iv) there is insufficient attention to the viability of the purchaser (‘The insolvency practitioner has no legal requirement to look at the future viability of the new business emerging from a pre-pack sale. His/her only legal responsibility is to the creditors of the old business. However both public perception and our research suggest that future viability, especially in the case of connected party pre-packs, is a concern for both transferring suppliers and new ones. Again I think more could be done to demonstrate the potential viability of the new business/company emerging from the pre-pack.’)
The report ends with a summary of Recommendations. These include the establishment of a ‘Pre-pack Pool’ of experts that can be approached by connected parties before the sale and disclose details of the deal, for the pool member to opine on. It is also recommended that – on a voluntary basis – a connected party complete a ‘viability review’ on the new company. Several recommendations follow to improve the Statement on Insolvency Practice (SIP). SIP 16, introduced in 2009, requires an administrator executing a pre-pack to provide creditors with an explanation and justification on why the pre-pack was undertaken, within seven days after the pre-pack. It is recommended that SIP 16 will, amongst others, be amended to the effect that valuations must be carried out by a valuer who holds professional indemnity insurance. The Insolvency Service should withdraw from monitoring SIP16 statements; monitoring should be done by the Recognised Professional Bodies: ‘Should these measures fail to have the desired impact and they are not adopted as I would hope by the market, then Government should consider legislating’, Ms Graham concludes. The report will certainly be of use during the discussion on the Dutch draft Act Continuity of Business (‘WCO I’), which was approved by the Dutch government last week.