Re Kayley Vending Ltd
Re Kayley Vending Ltd [2009] EWHC 904 (Ch) is a UK insolvency law case outlining guidance on the use of the pre-packaged administration procedure when a company is unable to repay its debts.
Facts
Kayley Vending Ltd was in the business of running cigarette machine vending machines in public houses. Facing cash flow problems arising from the ban on smoking in public houses, the company was unable to pay £79,000 in taxes that were then owing to HM Revenue and Customs. The directors faced a winding up petition by HMRC, and sought to enter into a company voluntary arrangement. HMRC rejected that proposal, but took no position as to the directors applying to court for an administration order under the Insolvency Act 1986.[1] This the directors did, contemplating a pre-packaged administration which had been negotiated with the insolvency practitioners and the company’s two principal competitors, who were prepared to buy the business as a going concern. The proposed administrator believed that they would be the most likely purchasers and would be prepared to pay most for the assets.He contended that, if the company were to go into liquidation and the machines could not be serviced, they could not be sold in their present locations and would have to be removed and sold separately at a much lower value.
Judgment
HH Judge David Cooke held that the administration had a reasonable prospect of achieving a better return, and granted approval. Applicants for a prepack administration should provide sufficient information for a court to see that a prepack deal is not being used to disadvantage creditors. Furthermore, a proposed administrator’s costs may be counted as an expense of liquidation,[2] and so it was here where the costs were incurred for the good of the creditors as a whole. It would not be so if a prepack sale was to the management, rather than an arm’s length purchaser. In the course of his judgment he discussed the concerns about pre-pack admininstrations.
- Current guidance notes for the insolvency profession should not put any undue burden or expense on the proposed administrator to provide much or all of the information required to the court at the time the application for an administration order is made.[3][4]
- The main reasons why a prepack may be considered inappropriate or ineffective would include:[5]
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- A pre-packaged business has not, by definition, been exposed to the competitive forces of the market, which may lead to the business being disposed of for a consideration less than would have been obtained had it been marketed for an appropriate period.
- Where a pre-pack is effected through administration, the rights of stakeholders to participate in the decision-making process, as envisaged by the Insolvency Act 1986, are frustrated.
- The pre-pack process is insufficiently transparent: creditors, or at least certain classes of creditors, are not provided with information adequate to allow them to measure whether the practitioner has carried out his functions in a manner that has not improperly or unlawfully prejudiced their interests.
- Linked to the previous point, a lack of transparency inevitably results in a want of accountability: creditors are entitled to challenge the practitioner’s conduct but are disabled from doing so without the information necessary to mount a challenge;
- Pre-packs may be unacceptably biased towards the interests of secured creditors, most notably floating charge holders. There may be no incentive to negotiate a consideration for the business much over the amount necessary to discharge the secured indebtedness, especially where a valuation puts these two sums reasonably close.
- Pre-packs may also be geared rather more towards achieving enough to satisfy the claims of the floating charge holder and the practitioner’s fees and expenses, with no effort at capturing any premium over and above these amounts.
- Where a pre-pack involves the sale of a business to a party previously connected with the company, usually as director, the process resembles the practice of "phoenixing", which of itself gives rise to the imposition of qualification requirements on those who wished to act as office-holders in relation to insolvent companies, following the recommendations of the Cork Committee.
- Linked to the above, the opportunities for and appearances of collusion with the purchaser of the business are heavily amplified where a sale of a business is effected through a pre-pack.[6]
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- A corollary of one of the advantages claimed for the pre-pack is that there may be difficulty obtaining funding in order to enable the administrator to continue to trade whilst he negotiates a sale of the business. If the negotiation process takes place before his appointment, and the business is continuing to trade in that period, there is an obvious risk that credit incurred in that period will not be paid so that the negotiation takes place at the expense of the creditors.[7]
- The concerns of those outside the process have been expressed elsewhere more forcefully:[8]
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- A company is heading into trouble. Its directors and shareholders are introduced to an appealing fellow who drives a very nice BMW who explains that if they work with him they will get rid of most of their creditors and buy back the business pretty well immediately at a very modest cost. Great sales pitch!
- All they need to do is work with him to sort out an administration at a convenient date with, of course, a suitably appealing fellow to act as administrator at a fee commensurate with his taste in cars.
- The directors are concerned that the administrator will sell to someone else at such a bargain price … doesn't he have to look for the highest price?
- The answer, much accompanied by head and eye movements, is that as long as you can come up with a plausible answer to the effect that it seemed likely no one else was interested (quite likely in view of the secrecy) or that the directors were likely to pay the best price (anybody's guess) or it would be too damaging to the business to shop it around (clearly an adoptable opinion) then there is no need to offer the company around.
- Funnily enough, the rapid growth in pre-packs … has given rise to unpleasant practices.
- The organising administrator has a clear conflict of interest as typically he wants to get the appointment and the management can influence that … It may suit a bank as it can allow it to participate in the equity going forward in a controlled way or to provide it with an assured return potentially at the expense of other creditors. Administrators generally like helping banks.
- In the real world you see what look to be abusive practices. Pre-packs are carefully planned months or weeks in advance. Potentially, all goods and services acquired thereafter are being acquired with no intention of payment … but rarely do you see companies ceasing to incur credit for a period before a pre-pack…
- The victims are usually the general creditors as the assets are sold at an undervalue but they struggle to prove it or lack the economic incentive to go to law in often complex circumstances. Who do they sue–the company (worthless), the directors (probably dodgy) or the administrator (professionally advised and well-informed)?
- The USA has a more ordered form of pre-pack with some judicial review. Here the prepack is not a legal structure but a practice. There is an infrequent need for pre-packs BUT only rarely is there a compelling case for not trying hard to follow the law by seeking to maximise realisations for creditors…
- This whole area of pre-packs needs regulation … Perhaps a judge should bless prepacks before they are implemented.[9]
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- A general summary of these concerns would be that the speed and secrecy which give rise to the advantages claim for pre-packs may too easily lead the directors and the insolvency practitioner to arrive at a solution which is convenient for both of them and their interests (perhaps also satisfying a secured creditor who might be in a position to appoint his own receiver or administrator), but which harms the interests of the general creditors because:
- it may not achieve the best price for the assets
- credit may be incurred inappropriately in the pre-appointment period
- they are deprived of the opportunity to influence the transaction before it takes place, and
- having been presented with a fait accompli, they have insufficient information to make it worthwhile investigating and challenging the decisions taken.[10]
See also
Notes
- ↑ IA 1986, Sch B1, para 12(1)(b), as inserted by the Enterprise Act 2002
- ↑ IA 1986, Sch B1, para 13
- ↑ Kayley, par. 4–5
- ↑ "SIP 16 - Pre-Packaged Sales in Administrations" (PDF). Association of Business Recovery Professionals. January 2009. Retrieved 10 July 2013.
- ↑ Kayley, par. 7
- ↑ Dr Sandra Frisby (August 2007). "A preliminary analysis of pre-packaged administrations" (PDF). Association of Business Recovery Professionals. pp. 8–9. Retrieved 10 July 2013.
- ↑ Kayley, par. 8
- ↑ Kayley, par. 10
- ↑ Jon Moulton (Autumn 2005). "The uncomfortable edge of propriety - prepacks or just stitch ups?". Recovery Magazine.
- ↑ Kayley, par. 11
References
External links
