A landmark case highlights that the courts are
willing to permit the "pre-pack" type insolvency process where it
can be shown that the sale of the business as a going concern will
(i) preserve more jobs than in a liquidation and (ii) cause the
minimum of disruption.
The case concerned a solicitors’ partnership,
which owed a significant tax liability to HM Revenue & Customs
("HMRC"). Negotiations to settle this proved unsuccessful and HMRC
served a statutory demand on the partnership.
However, some of the partners were interested in
acquiring the business and assets of the partnership through an
administration sale. Together with the proposed administrator, they
argued that a better result for the creditors would be achieved
through an administration, for the following reasons:
- the value of the assets and goodwill would be maximised;
- approximately 50 employees’ jobs would be preserved.
(This would result in a reduction in the preferential claims which
in a liquidation, would be paid in priority to the claims of
unsecured creditors, including HMRC); and
- there would be a continuity of service to the clients.
HMRC argued that where the court knew that the
major creditor opposed the pre-pack, that creditor should be able
to veto the administration sale.
Decision of the Court
The court rejected the oppositions by HMRC to the
sale of the business by way of an administration, arguing that it
should take into account not just the majority creditor’s
view, but that of all stakeholders, including employees and
The judge stated that he was "particularly
influenced by the fact that through the proposed sale 50 jobs would
be preserved and that the sale would result in the affairs of the
partnership’s clients being dealt with, with the minimum
On the facts, if a winding-up order had been made,
it is likely that the Law Society would have intervened to protect
client’s interests. This would get rid of any remaining value
in the business, as any realisations would first be applied to the
costs of the intervention. It would therefore be unlikely that the
creditors would receive any return.
The pre-pack mechanism has met considerable
controversy, as it is viewed as a somewhat artificial mechanism
whereby debts owed to creditors are written off, and the new owners
are the same as the old.
Recent research commissioned by R3, however, has
shown a significant increase in the use of pre-packs since the
Enterprise Act 2002 and this case validates the pre-pack as a
legitimate rescue tool.
The judge placed significant reliance on the
expertise, experience and impartiality of the insolvency
practitioners who were the prospective administrators. If they are
of the opinion that the purpose can be achieved, very clear
evidence will be required to overturn this. The majority
creditor’s view of itself cannot prevent the implementation
of the proposed administrator’s proposals.
In addition, practitioners argue that with a
people-business that depends upon its reputation, a quick
administration sale is essential.
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