DR SANDRA FRISBYASSOCIATE PROFESSOR AND READER IN

COMPANY AND COMMERCIAL LAW UNIVERSITY OF NOTTINGHAM

CCR-INTERACTIVE 2014 , 7 OCTOBER, LONDON

Pre-packs and the insolvency regime – an update

Insolvency Procedures: 1987 - 2013

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Insolvency Procedures: 1987 - Present

Compulsory liquidation Creditors Voluntary Liquidation Administration Receivership Company Voluntary Arrangement

And 2014?

Figures for first two quarters of the year available Compulsory liquidations and creditors’ voluntary

liquidations both down in numbers from the same period on 2013

Administrations down from same period in 2013 Receiverships down from same period in 2013 CVAs down from same period in 2013

So insolvency numbers appear to be falling!

Why this matters to credit professionals

Formal insolvency procedures represent the last chance saloon for recovery of a debt

And, in most cases, the only mechanism available Liquidations and administrations and some CVAs legally

prohibit many forms of individual enforcement actionTherefore the conduct of the procedure is

important Actions of presiding insolvency practitioner may affect the

chances and degree of recovery Dealing with retention of title claims Sale of assets and/or business and maximisation of realisations Providing information on conduct of procedure and potential

outcomes for all classes of creditor

Areas of interest

Pre-packs! Outcome and recommendations of independent review

Retention of title claims Developments from the courts

Transparency and Trust Outcomes of BIS consultation

The pre-pack back story

What is a pre-pack? Company in financial difficulties Insolvency practitioner, prior to formal appointment,

negotiates sale of business of the company Practitioner appointed (usually as administrator) and

immediately executes saleWhy the controversy?

The ‘phoenix’ pre-pack (sale to existing owner/managers)

Do pre-packs maximise value? Especially for unsecured creditors

Lack of transparency and accountability of practitioner

From 2008(ish) to present

Considerable press coverage following high profile pre-packs Whittards of Chelsea, The Officers Club, USC and Mosaic

Courts, however, have consistently ‘sanctioned’ the strategy Re DKLL Solicitors LLP [2007], Re Kayley Vending Ltd

[2009], Re Johnson Machine and Tool Co Ltd [2010]SIP 16 (January 2009, amended November 2013)

addressing transparency and accountabilityAnd from the Government…

Legislative intervention shelved in 2012 Independent review announced in 2013

The independent review into pre-packs

Carried out by Theresa Graham, as part of the Transparency and Trust programme Reported in June 2014

Main findings of the review Job preservation (within pre-packaged business) is a clear advantage

of the strategy Upstream costs of insolvency are significantly reduced by pre-packing Some economic benefits accrue to UK plc through pre-packs Transparency still a problem, leading to unsecured creditor feelings of

distrust and disenfranchisement Particularly in case of phoenix pre-packs

Marketing the business needs to be improved to ensure optimisation of value for creditors

Long-term viability of the business is not required to be considered Leading to recidivism, most notably amongst phoenix pre-packs

The pre-pack recommendations

Light touch approach, so no legally binding developmentsThe establishment of a ‘pre-pack pool’

For phoenix pre-packs, voluntary submission of the deal by proposed director of Newco to the pool before it is executed Pool to be comprised of ‘experienced business people’ who will comment

on the propriety or otherwise of the deal Pool’s comments to be included in SIP 16 report sent out to creditors

The voluntary viability review To be drawn up by proposed director of Newco, again in phoenix

pre-packs, explaining how it is proposed that Newco survives for at least 12 months after the statement Where viability review is drawn up, this will be included in SIP 16

report, and where it is not, the administrator providing the SIP 16 statement will explain that the review was requested but not completed

Recommendations as to marketing and valuation

The devil in the detail?

As yet, no news on the establishment of the pre-pack pool, although Government has asked for nominations Concerns expressed over how quickly and efficiently the procedure will work

in practice SIP 16 still has to be ‘beefed up’ to accommodate

recommendations Unclear as to likely level of ‘take-up’ of submission to the pool, or

completion of viability review Or, indeed, of how insolvency practitioners will approach cases of non-

submission or non-completion How will this be monitored?

Government has reserved power to legislate in Small Business Enterprise and Employment Bill (currently before Parliament)

Will the ‘new’ regime increase transparency and accountability and improve confidence? Over to you!!

Caveat Venditor! Retention of title

Blue Monkey Gaming v Hudson [2014] The facts

Slot machines supplied on retention of title terms to the Agora Group

Agora enters into administration and BMG’s slot machines are sold during the course of the administration

BMG sues the administrators in the tort of conversion (wrongful sale of its slot machines)

The issue – are administrators under an obligation to identify assets subject to retention of title clauses? Answer – no! The onus is on the owner of the property to a)

unequivocally require delivery up of the property; b) compile inventory of its own property to substantiate its claim.

CableVision!

Transparency and Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business (BIS, July 2013) Bolstering the potential for wrongful and fraudulent trading

actions Permitting assignment of actions (to creditors!) But simply ‘reverses’ some of the sillier aspects of the Jackson

reforms Compensatory awards against disqualified directors

But disqualification is the trigger… and numbers have fallen consistently, despite an increase in the reporting of misconduct

BIS, April 2014 – both these initiatives will be taken forward “when parliamentary time allows”…