Author Toby Kramers

Issue Winter 2009

Pub IOD

An emerging feature of this recession has been the “prepack” administration, which is used to enable the owner or directors of an insolvent company to transfer the core business of that company to a new company, free of the claims of creditors.

Pre-packs emerged as a result of the Enterprise Act 2002 which allowed for the appointment of an administrator to rescue the company as a going concern but, if that was not practical, to realise the assets of the company for the creditors.

This process of administration contrasted with liquidation (where the company was wound up) and administrative receivership (where an appointment was made by a holder of a Floating Charge). An administrator is required to perform his functions in the interests of the creditors as a whole.

This procedure is attractive for a number of reasons. Section 216 of the Insolvency Act 1986
places a general embargo against proprietors of insolvent companies setting up another company with a name similar to that of a failed one. However, the Enterprise Act, combined with new rules, which came into force in August 2007, allowed for these
phoenix company rules to be circumvented provided that requisite notices were served.

A further advantage of the pre-pack is the way in which it manages to circumvent Section 320 of the Companies Act 1985. Under this section, if a buyer is a director or a person connected with the director, shareholder ratification of the transaction
will normally be required.

These provisions were replaced in October 2007 by Sections 190 to 196 of the Companies Act 2006 which exempted an administrator from this requirement. Pre-packs are becoming an increasingly important part of a commercial property practice. Where an insolvent company occupies commercial property pursuant to a lease which, typically, prohibits assignment without consent, it is possible for a landlord either to insist that a proper licence is concluded or attempt to forfeit the lease for unlawful assignment.

However, if he does not allow the assignment to go ahead, the landlord might be faced with an empty premises generating no income and rendering the landlord liable for rates. In these circumstances, he will frequently be prepared to waive the breach. A real risk for commercial landlords is the situation where a pre-pack is used in the case of a high street retail business with multiple premises. The insolvent company can use the pre-pack to transfer the assets of the more profitable stores to the purchasing company, then to wind up the company and allow the liquidator to disclaim the remaining leases. The landlord will be an unsecured creditor facing little real prospect of recovering outstanding rents.

The pre-pack will be here for the foreseeable future. There is clear judicial blessing for the procedure and while courts have expressed concern that the procedure should not be abused, it will frequently be assumed that the procedure will operate in the best interests of the creditors as a whole by preserving a business.

Toby Kramers, Partner

Head of Commercial Property

Tel: 01473 232425

Published with kind permission of the IOD

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