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Pre-Packs - Out of the Shadows

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Pre-packs have certainly been the subject of discussion both by the media and the Government over the last few months. The high profile administrations in the retail sector of Woolworths Plc, USC and Whittards have brought this particular insolvency procedure centre stage.

Insolvency professionals say that they save jobs and preserve the value of assets. On the other side of the debate Creditors claim they are in some way underhand and simply a device to sell company assets back to its management, who continue to trade and drop the debts.

During 2008 the Pre-pack procedure was considered by the court. An unsuccessful challenge to a Pre-pack administration was pursued in the case of DKLL Solicitors v HMRC. HMRC was the majority creditor. The Court made no criticism of the pre-pack procedure and the Administration order was made - despite opposition from the Revenue.

The Statement of Insolvency Practice 16 (E&W) (SIP 16) came into effect on 1 January 2009. Its aim appears to be to eradicate the perceived lack of transparency and it imposes increased disclosure obligations on Insolvency Practitioners.

It provides a list of information that must be disclosed to creditors unless there are "exceptional circumstances" in which case the information may be withheld. There is however no detailed guidance as to what constitutes "exceptional circumstances" and the onus is on the Insolvency Practitioner to show that there are exceptional circumstances.

Where there is a sale to a connected party it is most unlikely that considerations of commercial confidentiality will outweigh the need to provide creditors with this information. If in doubt the practitioner should seek advice.

Summing up, despite the controversy surrounding pre packs it certainly appears that they are here to stay. Whether the obligations that SIP 16 imposes will be subject to the scrutiny of the court on an application by a disgruntled creditor remains to be seen. Certainly for practitioners any breach of the provisions of SIP could lead to disciplinary or regulatory action and practitioners are well advised to follow the guidance set down by their professional body and the Court.

If you have any questions about these or any other issues please do not hesitate to contact one the following members of the Insolvency and Business Recovery Team:

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