Insolvency law has produced more than its share of legal argument. One contentious matter which recently came before the court was whether ‘pre-pack’ transfers of insolvent businesses can be justified.
A pre-pack occurs when an insolvent business (or a part of it) is transferred to another business and, in effect, continues to trade. At issue is whether the whole process is merely a way of the old business shedding its liabilities and continuing, leaving creditors in the lurch. Pre-packs often involve some of the members of the management team of the failed company, which can cause anger on the part of creditors of the old company who have been left out of pocket. The new business appears to outsiders to be the same as the old one, except that it is now shorn of its liabilities.
In the case in point, the administrators of an insolvent partnership wished to transfer the business to a new limited liability partnership for a sale price of £400,000. The administrators considered that this would be the best solution as the value of the partnership’s assets and goodwill would be maximised and there would be continuity of service to the clients of the firm. In addition, the jobs of approximately 50 employees would thereby be saved, which would in turn reduce the preferential claim on the assets of the partnership (for compensation for loss of office) which would otherwise result.
HM Revenue and Customs (HMRC) was the major creditor of the partnership, being owed over £1.7m in PAYE, VAT and National Insurance Contributions. They opposed the sale by the administrators. However, in such circumstances it is for the court to decide whether or not to approve the sale, not the creditors. Had the proposal been decided by a vote of the creditors (such votes give creditors voting power proportionate to the sum they are owed), HMRC would have been able to defeat the proposal.
The judge dealing with the case was particularly impressed that the sale would lead to the preservation of employment of the firm’s staff. He accepted the impartiality and expertise of the insolvency practitioners and was of the view that only very strong evidence to the contrary should be allowed to overturn arrangements made on the basis of their professional judgment.
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Partner Note
DKLL Solicitors v HMRC [2007] EWHC 23067 (Ch).