Pre-Packs And Administration Orders – Hibernia (2005)

Why so Controversial?

Pre-pack sales have been accepted by the Court as a legitimate method of achieving the aims of administration, even in cases where the court or creditors' approval has not been obtained in advance.

Pre-pack sales are of course popular because they facilitate the smooth transfer of a business upon administration, which minimises damage to the business' goodwill and may also mean that more jobs are saved. However, pre-packs are criticised for a lack of transparency and for favouring convenience over the interests of creditors.

In Hibernia (2005) Limited [2013] EWHC 2615 (Ch) the Court identified a number of concerns about pre-packs:

1. A pre-pack sale may not achieve the best price for the assets, not least because (in order to disguise financial difficulties and maintain public image) the administrator will (often) not have openly marketed the business.
2. Credit may have been inappropriately incurred prior to the administrator's appointment.
3. Creditors are deprived of the opportunity to influence the transaction before it takes place.
4. Once the sale has taken place, creditors often have insufficient information to investigate and challenge the decisions taken.

Hibernia (2005) Limited [2013] EWHC 2615 (Ch)

Facts

Receivers were appointed over Hibernia when it defaulted under the terms of a credit agreement relating to the refinancing of a leasehold interest in a London property. The receivers conducted a lengthy marketing process and received two serious bids for the property. A bid by Canary Wharf Group plc ("CWG") was preferred by the receivers. Heads of terms were agreed and a period of exclusivity was granted for negotiations to take place. During this period, a further bid was submitted. However, the bid by CWG remained preferred because CWG had a good track record, it offered to take on certain liabilities of Hibernia and it was affiliated with the freeholder so less intensive due diligence would be required on the sale.

One of the key terms required by CWG was that there would be no election to VAT in respect of the property, due to the substantial liability that CWG would incur should an election be made. In order to protect its position, CWG required Hibernia to go into administration six weeks prior to completion of the sale in order to ensure that no election had been made (as notification of elections to VAT must be made to HMRC within 30 days).

The receivers applied for an administration order to implement the sale to CWG and to avoid the risk that CWG's offer would otherwise be lost. Hibernia argued that the proposed sale to CWG was an abusive transaction.

Decision

The administration order was granted. The Judge considered there was nothing to suggest that the application for an administration order and the proposed sale were an abusive transaction and that a proper marketing exercise had taken place with the best possible offers received in the circumstances. A number of points were made that may be of general interest:

• Periods of exclusivity to conduct negotiations in good faith are not uncommon and should be respected once agreed.
• Although it is unusual for a preferred bidder to require an administration order, it does not follow that there is an ulterior motive and in this instance a clearly intelligible reason was given for this requirement.
• The preferred bidder, in requiring an administration order to proceed with the sale, was not dictating the outcome to the court.
• The making of an administration order confirms no more than that the proposed transaction is not "obviously abusive". The Court does not confer its blessing on a proposed transaction unless its sanction is specifically sought.

The Judge held that it would be "completely unjustifiable" not to make an administration order in circumstances where there would be a serious risk of losing the preferred and best available bid if the Court did not do so.

Comment

This case demonstrates the continued judicial support for the pre-pack. However, the Court made it clear that the legitimacy of the application for an administration order is a separate issue to the legitimacy of the proposed sale transaction. Following the decision in Hellas Telecommunications (Luxembourg) II SCA (2009), the Court held that an administration order itself is not sufficient to sanction the underlying transaction.

As you may know, amendments to Statement of Insolvency Practice 16 become operative from 1 November 2013. The amendments introduce several new transparency measures, including requirements to:

• demonstrate that office-holders' duties under the legislation have been considered;
• explain to creditors which statutory purpose has been pursued, how the pre-pack sale enables that purpose to be achieved and to confirm that the price was the best that could reasonably be obtained in the circumstances. This information is to be provided with the first notification to creditors and in any event within 7 days of the sale; and
• seek the approval of the sale proposals as soon as practicable after appointment, and provide reasons for any delay in doing so.

These new requirements aim to provide more information to creditors at an earlier stage. However, SIP 16 falls short of requiring administrators to provide advance notice to creditors where a pre-pack sale is proposed.

The new SIP 16 is available at: http://www.insolvency-practitioners.org.uk/download/documents/977

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.