www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary

BRIEFING PAPER

Number 4915, 11 December 2019

Insolvency: company administration

By Lorraine Conway

Inside: 1. Introduction 2. The administration procedure 3. Advantages and

disadvantages 4. What are pre-packs?

Number 4915, 11 December 2019 2

Contents Summary 3

1. Introduction 4 1.1 When is a company insolvent? 4 1.2 What is company administration? 5

2. The administration procedure 7 2.1 Routes into administration 7 2.2 Moratorium 8 2.3 The administrator 8 2.4 Powers of the administrator 9 2.5 Payments by the administrator 10 2.6 Effect of administration on creditors 11 2.7 Effect of administration on employees 12 2.8 Effect of administration on directors 13 2.9 What will happen at the end of the administration? 13 2.10 Complaints about an administrator 14

3. Advantages and disadvantages 15

4. What are pre-packs? 16

Cover page image copyright: Pound coins / image cropped. Licensed under CC0 Creative Commons – no copyright required.

3 Insolvency: company administration

Summary Insolvency arises when a company has insufficient assets to cover its debts or is unable to pay its debts as and when they fall due. The company administration procedure is set out in the Insolvency Act 1986 (IA 1986), the procedure was extensively reformed by the Enterprise Act 2002 with the aim of making it a more accessible.

Administration is an insolvency process by which a company is placed under the control of a licensed insolvency practitioner, the “administrator”, who must try to achieve certain statutory objectives. At its heart, administration is a company rescue procedure. When an administration order is in place, a moratorium (often described as a “protective cloak”) is placed around the company to protect it from legal actions whilst a survival plan is being formed. If the rescue of the company is impossible, the administrator must aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation through an orderly wind down of the company’s affairs. If this is impossible, the administrator must realise the company’s property to make a distribution to the company’s secured or preferential creditors.

In recent years, administration has been in the “limelight” due to the large number of high-profile administrations on the high street. This Commons briefing paper provides an outline of the main characteristics and objectives of the administration process, including pre-packaged administrations (known as “pre-packs”), and the distinctive role of the administrator. It also highlights why, in certain circumstances, administration can be an important company rescue insolvency procedure. This paper applies to England, Wales and Scotland.

Number 4915, 11 December 2019 4

1. Introduction

1.1 When is a company insolvent? Insolvency arises when a company has insufficient assets to meet all its debts or is unable to pay their debts as and when they fall due. It is the company directors’ responsibility to know whether the company is trading whilst insolvent and they can be held legally responsible for continuing to trade in that situation (the offence of wrongful trading).

Depending on the exact circumstances, various formal insolvency procedures may be available to an insolvent company (see Box 1 below).

Box 1: What insolvency procedures may be open to an insolvent company?

These fall into six main categories. The first four provide the potential for the rescue of the company or its business, while the last two do not:

• Administration

• Company Voluntary Arrangement (CVA)1

• Scheme of arrangement2

• Administrative receivership3

• Compulsory liquidation4

• Creditors’ voluntary liquidation5

1 A Company Voluntary Arrangement (CVA) is a compromise or other arrangement

with creditors under Part 1 of the Insolvency Act 1986, which is implemented under the supervision of an insolvency practitioner (known as a nominee before the proposals are implemented, who then becomes known as the supervisor). The arrangement will be binding on all creditors if the relevant majorities vote in favour of the proposals at a properly convened meeting of creditors. The arrangement does not affect the rights of secured or preferential creditors, unless they agree to the proposals. Small companies currently have an optional moratorium before any CVA is put in place, although the UK government intends to bring forward legislation to remove this as it is currently little used (see Changes to UK corporate insolvency framework: BEIS response to 2016 consultation).

2 A scheme of arrangement is a compromise between a company and its members or creditors (or any class of them) under Part 26 of the Companies Act 2006. A scheme can be used to effect a solvent reorganisation of a company or a group structure (including merger or demerger), as well as to effect insolvent restructurings (such as by a debt for equity swap or other debt-reduction strategies). A scheme requires approval by at least 75% in value of each class of the members or creditors who vote on the scheme, being also at least a majority in number of each class.

3 Administrative receivership is the process where the holder of a qualifying floating charge appoints an administrative receiver to realise the assets of a company that has breached the terms of the security agreement or debenture (i.e. loan).

4 Compulsory liquidation occurs when a company is wound up by a court order, usually as a result of a creditor presented a petition to the court on the grounds that the company is unable to pay its debts. The purpose of the liquidation is for a liquidator (an insolvency practitioner) to take control of the company and wind up its affairs in an orderly way and for the benefit of the company’s creditors.

5 Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure which involves the directors of an insolvent company voluntarily choosing to bring their business to an end and wind up the company.

5 Insolvency: company administration

1.2 What is company administration? Administration is an insolvency process; a company rescue procedure. For a viable company in financial difficulty, administration can create a breathing space in which to restructure and rescue the company so that it can continue trading as a going concern. It involves the appointment of an insolvency practitioner, called an “administrator”, who works with the company to put together proposals to rescue the company. Importantly, whilst in administration the company can continue to trade.

Insolvency legislation sets out a hierarchy of statutory objectives. In brief, an administrator must perform his functions with the objective of either:

• rescuing the company as a going concern (i.e. with as much of its business as possible); or

• achieving a better result for the company’s creditors than would be likely if the company were wound up without first being in administration; or

• realising company assets in order to make a distribution to one or

more secured or preferential creditors.

The administration procedure is designed to hold a business together while plans are formed to put in place a financial restructuring to rescue the company (as opposed to the business that the company carries on) so that it can continue trading as a going concern.6 If the rescue of the company is impossible, the administrator must aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation.7 For example, a better return may result from trading on for a period whilst seeking to sell off the business and or assets. If this objective is also impossible, the purpose of the administration is to realise (i.e. sell) the company’s assets to make a distribution to the company’s secured or preferential creditors.8

In trying to implement these statutory objectives, the appointed administrator has the benefit of a “moratorium” by which creditors and others are prohibited from taking or pursuing legal proceedings against the company while it is in administration. For the duration of the administration, the administrator is required to act in the best interests of the general body of creditors.

There are various circumstances when administration may be useful, including, where:

• the company is facing severe cash-flow pressures but there is still a good business to preserve;

• there is a requirement to quickly sell on the business of a technically insolvent company;

6 Paragraph 3(1)(a), Schedule B1, Insolvency Act 1986 7 Paragraph 3(1)(b), Schedule B1, Insolvency Act 1986 8 Paragraph 3(1)(c), Schedule B1, Insolvency Act 1986

Whilst in administration, the company can continue to trade

Number 4915, 11 December 2019 6

• creditors are not willing to agree to an alternative course of action

(such as restructuring) or agreement is not possible within a manageable timescale.

7 Insolvency: company administration

2. The administration procedure

2.1 Routes into administration There are two routes into administration:

(i) by a court order made at a formal hearing, or

(ii) by certain parties lodging a series of prescribed documents9 at court (the simple “out-of-court route)

An application for a court order can be made by:

• one or more creditors of the company, • the company itself or its directors, • a liquidator or a supervisor of a company voluntary arrangement

(CVA) (effectively, to replace the liquidation order or CVA with an administration order), or

• under section 359 of the Financial Services and Markets Act 2000 or section 87A of the Magistrates’ Courts Act 1980.

In respect of the “out-of-court route”, a company can be put into administration by filing at court a notice of appointment and certain specified supporting documents. The procedure may be commenced by either:

• the company acting either through its directors or shareholders (in both cases by passing a valid resolution in accordance with the company’s articles);10 or

• a qualifying floating charge holder (a “QFCH”) (i.e. a bank or other commercial lender which has a “floating charge”11 that meets the requirements of paragraph 14(2) of Schedule B1 to the IA 1986).

A company (acting through its directors or shareholders) cannot go into administration unless it is insolvent or is likely to become insolvent (but is not already subject to a winding up petition or in liquidation and has not already been in administration or a CVA12 within the previous 12 months). In addition, the company must first give 5 day’s prior notice to any QFCH.

This requirement that the company must be insolvent or likely to become insolvent, does not apply if the administration is commenced by 9 To apply to the court for the appointment of an Administrator requires an affidavit

from the party requesting the order, setting out details about the company, with an outline of what is proposed, together with a statement of opinion from the proposed Administrator that the purpose of administration is likely to be achieved.

10 A “qualifying floating charge holder” is any creditor holding a floating charge over substantially all of the company’s assets, which explicitly allows the creditor to appoint an administrative receiver or, where the charge specifically states that it is a qualifying floating charge, entitling the holder to appoint Administrators.

11 A floating charge is taken over all the assets or a class of assets owned by a company from time to time as security for borrowings or other indebtedness. The advantage of a floating charge is that before insolvency, it allows the charged assets to be bought and sold during the course of the company’s business without reference to the charge holder. The floating charge is said to ‘crystallise if there is a default. At that stage, the floating charge is converted to a fixed charge.

12 For a definition of a Company Voluntary Arrangement (CVA) see footnote 1

Administration court order made at a formal hearing

Out-of-court route into administration

Number 4915, 11 December 2019 8

a QFCH, but the company must be in default of the charge. Before commencing an out-of-court procedure for the appointment of an administrator, the QFCH must first give 2 day’s prior notice to any holder of prior qualifying floating charge.

2.2 Moratorium The administration process includes a statutory moratorium to protect the company from enforcement actions by creditors (see Box 2 below). An interim moratorium will apply before the administration starts, from the time an application is made to the court for an administration order or, if the out-of-court route is used, from the time a notice of intention to appoint an administrator is filed in court.

The moratorium is intended to provide the company and the administrator with a “breathing space”, freeing them from creditor pressure, giving them time to formulate proposals, lay them before the creditors and implement those which are approved. This moratorium on insolvency and on other legal proceedings against the company, is sometimes referred to as a “protective cloak”.

Box 2: Moratorium in company administration

The administration procedure includes a moratorium; it suspends the power of creditors to take certain actions against the company in administration or its property. Specifically, the moratorium prevents the following, unless the administrator or the Court agree that such actions can be taken:

• the enforcement of security over the company’s property (except in certain specified circumstances under the Financial Collateral Regulations);

• the repossession of goods in the company’s possession under a hire purchase agreement (which term includes retention of title provisions);

• a landlord’s right of forfeiture by peaceable re-entry;

• the appointment of an administrative receiver; and • any legal process (including legal proceedings, execution, distress and diligence) against the

company or its property.

2.3 The administrator The appointed administrator must be a qualified insolvency practitioner. Often more than one administrator is appointed to act jointly (and, typically, severally, so that each administrator can act alone).

An administrator is an agent of the company to which he is appointed.13 He is also an officer of the court14 and as such, has a duty to act in good faith; he must be, and be seen to be, independent and impartial in his management of the company and in his dealings with its property.

The costs incurred by the administrator are paid from the company’s assets. The IA 1986 provides that the administrator’s remuneration and expenses are paid out in priority to floating charge security and in

13 Paragraph 69, Schedule B1, Insolvency Act 1986 14 Paragraph 5, Schedule B1, Insolvency Act 1986

Who pays the administrator?

9 Insolvency: company administration

priority to preferential debts or the prescribed part (see section 2.5 of this paper below).

2.4 Powers of the administrator Once in administration, the company is placed under the day-to-day control and management of the administrator; all company property comes under his control.15 In terms of powers, the administrator can do anything “necessary or expedient for the management of the affairs, business and property of the company”.16

As already mentioned, the purpose of administration is to achieve one of three statutory objectives:

(i) rescuing the company as a going concern; or (ii) achieving a better result for the company’s creditors than would be likely if the company were in liquidation; or (iii) realising property in order to make a distribution to one or more secured or preferential creditors.

The administrator must consider the first objective and can only pursue the second or third objective once he is satisfied that the first objective is no longer practical or possible. In outline, the administrator’s role is as follows:

• To prepare his formal proposals for achieving the purpose of the administration within 8 weeks. (It is not unusual for proposals to include some form of voluntary arrangement or a compromise with creditors). Whilst in administration, the company can continue to trade.

• The administrator has a further 2 weeks to convene a meeting of creditors to consider his proposals. If creditors agree, it is possible to dispense with a creditors’ meeting and instead pass resolutions by way of correspondence.

• If a meeting of creditors is called, details will be sent with the administrators’ formal proposals. Whilst the purpose of the meeting is to allow the creditors to consider and vote on the proposals, a committee of between 3 and 5 creditors’ representatives may also be elected to assist the administrator.

• The proposals will be approved if a majority of creditors in value vote in favour.

15 Paragraph 67, Schedule BI, Insolvency Act 1986 16 Paragraph 59(1), Schedule B1, Insolvency Act 1986

The administrator has wide-reaching powers.

Number 4915, 11 December 2019 10

• Where the administrator believes there will be no funds for unsecured creditors, only the preferential17 and secured18 creditors are required to approve the proposals. There will be no creditors meeting if there is not going to be a dividend paid to the unsecured creditors.

The administrator has a statutory duty to perform his functions:

• as quickly and efficiently as is reasonably practicable;19 and • with regard to the interests of the company’s creditors as a whole.

2.5 Payments by the administrator Once a company has gone into administration, creditors are understandably anxious about when they will be paid. The administration process is complex, and each case is unique. It obviously takes time to assess the company’s position and provide an estimate of the amount or timing for reviewing creditors’ claims and making a distribution. In most cases, the administrator will include an update of dividend prospects and, if possible, a timeframe in their proposals and reports.

If there is a sale of all or part of the company’s business, the administrator can elect to distribute the proceeds to the company’s creditors. Alternatively, he may decide to transfer the proceeds to a liquidator, who would then deal with the distribution process. In either case, the administrator or liquidator is under a duty to make such distributions in accordance with a statutory order of priority (see Box 3 below).

Box 3: Statutory order of priority for repayment to creditors

The IA 1986 (Schedule 6) provides detailed rules for the order of distribution of assets and repayment of the company’s unsecured debts. The statutory hierarchy for repayment to creditors is as follows:

• Secured creditors have a “fixed charge” over a specific asset (such as land, a building, or machinery). The secured creditor is entitled to be repaid out of the proceeds from the sale of those secured assets, after the costs of realisation have been deducted. Where a commercial lender (such as a bank) has taken as security a “floating charge” over the company’s assets, they will be paid out of the proceeds of sale after the costs of realisation, and after the preferential creditors have been paid in full and the “prescribed part” has been set aside (see below). The “prescribed part” is a technical provision introduced by the EA 2002. When a secured creditor has a floating charge registered after 15 September 2003, a proportion of the

17 In insolvency, preferential creditors are those creditors whose claims rank in priority

to other unsecured creditors and floating charge holders (Schedule 6 and sections 175 and 386 of the Insolvency Act 1986 (as amended). They include certain employee claims and contributions to pension schemes.

18 A secured creditor is generally a bank that holds a fixed charge over a business asset or assets. When a business becomes insolvent, sale of the specific asset over which security is held provides repayment for this category of creditor.

19 Paragraph 4, Schedule B1, Insolvency Act 1986

11 Insolvency: company administration

funds available to them is set aside for distribution to unsecured creditors. This is the prescribed part.20 Insolvency legislation sets out how the prescribed part is calculated.

• Preferential creditors are certain unsecured creditors who rank ahead of secured creditors in respect of any security which was created as a “floating charge”. Preferential creditors primarily consist of employees for arrears of wages, accrued holiday pay, unpaid contributions to occupational pension schemes and state scheme premiums, all within certain limits.

• Unsecured creditors are all other non-secured and non-preferential creditors. These are usually the normal ‘trade’ creditors (i.e. those who have provided goods or services to the business). They rank below Preferential and Secured creditors, except for when the prescribed part is applicable (see below). Trade suppliers often want to take away goods they supplied to the company before it went into administration for which they have not been paid. Usually, they are not entitled to take away these goods until the administrators have determined retention of title issues (i.e. legal ownership). This involves a process of identifying the stock and reviewing the supply terms. All unsecured liabilities arising out of obligations incurred before the date of the administration will rank “pari passu” (i.e. ranking equally) with each other.

• Shareholders / members will be the last class of creditor to receive a distribution and they will only receive a distribution after everyone else has been paid in full.

In general terms, the costs of the administration are paid from the company’s assets. The IA 1986 specifically provides that the administrator’s remuneration and expenses are paid in priority to “floating charge security”21 and in priority to preferential claims or the prescribed part (see Box 3). 22 In other words, the costs of the administration are given priority over other claims except for those of secured creditors (i.e. fixed charge holders).

During the administration, the administrator can (as the company’s agent) cause the company to contract with third parties but does not assume personal responsibility. Any liability incurred under a contract agreed whilst the company is in administration will be payable as an expense of the administration. This means that sums due under such contracts are paid from the assets of the company in priority to the administrator’s fees and expenses, and distributions to floating charge holders and unsecured creditors.23

2.6 Effect of administration on creditors As outlined in section 2.2 of this paper, the company administration procedure has the benefit of an automatic statutory moratorium,24 20 In respect of administrations where there are pre-15 September 2003 floating

charges, there is no prescribed part 21 “Floating charge security” is defined in paragraph 70, Schedule B1, Insolvency Act

1986 22 Paragraph 99, Schedule B1, Insolvency Act 1986 23 Paragraph 99(4), Schedule B1, Insolvency Act 1986 24 Paragraphs 42, 43 and 44, Schedule B1, Insolvency Act 1986

Number 4915, 11 December 2019 12

which means that it is not possible for a creditor to bring or pursue legal proceedings against the company or its assets.

A creditor can ask the administrator or the court for permission to bring proceedings against a company in administration. However, it is fair to say that a creditor who has a monetary claim is unlikely to be granted permission; generally, only claims that have a proprietary nature can continue.

An obvious question is where does that leave the creditor? Often, the only option is for the creditor to submit details of their claim (known as a “proof of debt”) to the administrator and wait for him to assess it. The difficulty is that time (i.e. the limitation period) continues to run on claims during administration, so older-dated claims may need to be protected by obtaining the administrator’s acknowledgment of the company’s liability. Of course, much would depend on the exact circumstances.

As already mentioned in section 2.4 above, if a creditors’ meeting is convened, a creditor may be able to join a creditors’ committee to help the administrator fulfil the objective of the administration.25 That said, the administrator is under a duty to report on his progress to all creditors.

For information on how, and in what order, creditors are paid see section 2.5 of this paper. In a nutshell, once the company in administration has repaid its secured liabilities and preferential debts, any remaining money from the sale of company assets is paid to unsecured creditors, who receive a share of the assets proportionate to the size of the company’s debt to them (in accordance with the pari passu principle). Often, the return to unsecured creditors may be little, if anything.

2.7 Effect of administration on employees Company administration does not mean that the company’s employees are automatically dismissed. In order to keep the company trading whilst in administration, the administrator may adopt any contract of employment within the first 14 days of his appointment.

An important distinction is made between “qualifying liabilities” under adopted employment contracts and other sums due to employees. Qualifying liabilities are restricted to wages and salary (including holiday pay, sick pay, payments in lieu of holiday and contributions to occupational pension schemes).26 They are paid by the administrator in priority to his own fees and expenses, floating charge holders and unsecured creditors.27 Other sums due to employees (including any unpaid wages that accrued before the administration) rank only as an unsecured (but potentially preferential) claim.

25 Rule 3.39 and Part 17, Insolvency (England and Wales) Rules 2016 26 Paragraph 99(5), Schedule B1, Insolvency Service 1986 27 Paragraphs 99(5)(c) and 99(6), Schedule B1, Insolvency Act 1986

Trading whilst in administration

13 Insolvency: company administration

If the administrator can find a buyer to take over all or part of the business as a going concern, then jobs may be saved. Employees may be transferred with the business, their rights protected under special rules that apply to transfers of undertakings.

2.8 Effect of administration on directors Once appointed, the administrator is responsible for the day-to-day control and management of the company; all company assets come under his control. A director or officer28 of the company may be required to provide the administrator with a statement of affairs, itemising the company’s assets, liabilities and creditors. It is an offence not to comply with this requirement.

Due to the administrator’s wide-reaching powers, the directors’ powers are curtailed. In a nutshell, a director cannot exercise any management power that could interfere with the exercise of the administrator’s powers without prior consent from the administrator.29 If, however, the administration leads to the rescue of the company as a going concern, the administrator will hand control of the company back to the directors once the administration ends.

2.9 What will happen at the end of the administration?

The administrator is expected to act quickly and efficiently. In any event, administration automatically ends after 12 months, unless extended by the court or creditors.30 In practice, many companies remain in administration for more than one year and complex administrations can last several years.

At the end of the administration, there are various possibilities as to what might have happened to the company. It may have:

• been restored to solvency, perhaps through a Company Voluntary Arrangement (CVA);31

• been placed into liquidation, normally with the same insolvency practitioner that acted in the administration now acting as liquidator; or,

• been dissolved, if the administrator finds he is only able to distribute funds to secured and/or preferential creditors.

Not every administration will result in the rescue of a company. Often, the administration will end with the net proceeds of the company’s assets being distributed to the company’s creditors, either by the administrator or by a subsequently appointed liquidator (who may be the same person as the administrator). In other words, depending on the circumstances, at the end of the administration, the company will either move into liquidation or be dissolved without liquidation.

28 As defined by paragraph 47(3), Schedule B1, Insolvency Act 1986 29 Paragraph 64, Schedule B1, Insolvency Act 1986 30 Paragraph 76, Schedule BI, Insolvency Act 1986 31 For a definition of a Company Voluntary Arrangement (CVA), see footnote 1

If a buyer is found

Number 4915, 11 December 2019 14

In some cases, administration is used as an initial step to enable the company to propose and implement a company voluntary arrangement32 (CVA). If the proposed CVA is approved by the members of the company and by its creditors (in each case by the required majorities), the administration will end.

2.10 Complaints about an administrator The administrator is an officer of the court and has a statutory duty to perform his functions:

• as quickly and efficiently as is reasonably practicable;33 and • with regard to the interests of the company’s creditors as a whole.

Any concerns about the conduct of an administrator should, as a first step, be raised with the administrator directly or through any creditors’ committee. If the matter remains unresolved, the following statutory remedies may be available:

• A creditor or company member can apply to the court for an order on the basis that the administrator’s conduct has unfairly harmed his/her interests, or that the administrator is failing to perform his functions as quickly or efficiently as reasonably practicable. 34

• A creditor can apply to the court under the IA 1986 if there is evidence of misfeasance by the administrator.35

In serious cases, the court can remove the administrator.36 However, the court will not permit these remedies to be used by a creditor seeking to leapfrog claims of other creditors.

Finally, if the insolvency practitioner acting as administrator is judged to have acted improperly by their professional body, they may be subject to that body’s disciplinary proceedings.

32 Ibid 33 Paragraph 4, Schedule B1, Insolvency Act 1986 34 Paragraph 74(1), Schedule B1, Insolvency Act 1986 35 Paragraph 75, Schedule B1, Insolvency Act 1986 36 Paragraph 88, Schedule B1, Insolvency Act 1986 and Rule 3.65 Insolvency (England

and Wales) Rules 2016

15 Insolvency: company administration

3. Advantages and disadvantages Possible advantages of company administration include:

• Administration can be quick to initiate, especially through the out-of-court procedure.

• Administration offers a moratorium on creditor action and can save a viable company in financial difficulty (perhaps by giving the company a breathing space in which to devise CVA proposals). An administrator has wide powers to trade on or sell the business as a going concern without the liabilities.

• A pre-packaged administration (see Section 4 below) can be used to complete sale negotiations begun by the directors or the proposed administrator prior to the administration.

• Subject to the agreement of creditors, the administration procedure allows for the restructuring of the company, rescuing the business and preserving jobs.

Possible disadvantages of company administration include: • The court petition process is subject to the timetable of the court. • Eligible floating charge holders have a right to appoint their

choice of administrator. • The process can result in a discount on asset values. • Trading in administration will involve additional professional costs.

Number 4915, 11 December 2019 16

4. What are pre-packs?

Box 4: Definition of a pre-pack

• A “pre-packaged administration” (known as a pre-pack) is where an agreement to sell the assets of a failed company is agreed prior to the company going into formal insolvency and is then usually completed almost immediately after the appointment of the administrator.

• A pre-pack can be an effective way to save a business, but care must be taken to deal with creditor concerns.

When a business needs to be rescued there are often worries about maintaining value – both for existing creditors and for prospective purchasers trying to re-start the business. As a result, the practice of “pre-packaging” the administration process has developed.

In a pre-pack, a company is placed into administration and the business is sold shortly after the appointment of the administrator. Often, the insolvency practitioner, the directors and the bank will have obtained valuations, agreed a sales price and drafted contracts to enable the business to be sold immediately after appointment. The purchaser may be new to the company or a competitor, but it is also possible that the purchaser may be the existing management.

When used appropriately, pre-pack administration can be an effective company rescue procedure. Pre-packs enable the sale of company assets to be undertaken quickly (reducing the likelihood of important contracts being lost), preserving the brand and the value of the business and, ultimately, returns for creditors and jobs. However, there have been concerns about the transparency of the pre-pack administration procedure, where:

• businesses are sold to “connected parties” (i.e. directors, shareholders and others connected with the insolvent company);

• there are possible conflicts of interest for the insolvency practitioner (for instance, when appointed by the floating charge-holder); or

• there is a lack of involvement of unsecured creditors.

To address these concerns, a “Statement of Insolvency Practice (SIP) 16” was issued in January 2009 (and periodically updated), with additional measures being introduced on 31 March 2011. The current SIP 16 came into force on 1 November 2015. One of the requirements of SIP16 is that administrators are required to report the full facts of the pre-pack transaction to creditors within 7 days of the transaction taking place.

Following the publication of a Select Committee report in February 2013,37 the Government announced in July 2013 an independent review of the pre-pack procedure. The Graham Review into Pre-Pack

37 House of Commons Business, Innovation and Skills Committee, ‘The Insolvency

Service’, Sixth Report of Session 2012-13’, Evidence 67, [HC 675], 6 February 2013, [online] (accessed 11 December 2019)

17 Insolvency: company administration

Administration38 was published in June 2014 alongside Pre-Pack Empirical Research: Characteristic and Outcome Analysis of Pre-Pack Administration39 by the University of Wolverhampton. In response to the six recommendations made in the Graham report, the Government said it would work with business and industry to implement these recommendations in full. One of the key recommendations of the Graham report was that a pool of independent experts be set up in order to assess and give an opinion upon a proposed pre-pack sale to a “connected party”, but only if requested to do so by the connected party. On 2 November 2015, the Pre-Pack Pool became operational.

The Small Business Enterprise and Employment Act 2015 (SBEEA 2015) implemented another Graham recommendation, creating a reserve power for the Secretary of State to legislate if necessary. This wide-ranging Act also introduced several measures to amend various parts of the current insolvency framework and modernise insolvency law by removing unnecessary costs and regulatory burdens.

A separate Library briefing paper, Pre-pack administrations, (CBP 5035) looks in detail at how pre-packs work in practice under revised SIP 16; the “pros and cons” of the procedure; the recommendations of the Graham Review; and provides a summary of the measures introduced by the SBEEA 2015.

38 Graham Review into Pre-pack Administration – Report to Rt. Hon Vince Cable MP,

Teresa Graham CBE, June 2014, [online] (accessed 11 December 2019) 39 Pre-pack Empirical Research: Characteristic and Outcome Analysis of Pre-pack

Administration – Final Report to the Grahame Review, prepared by Professor Peter Walton and Chris Umfreville with the assistance of Dr Paul Wilson, University of Wolverhampton, April 2014, [online] (accessed 11 December 2019)

BRIEFING PAPER Number 4915, 11 December 2019

About the Library The House of Commons Library research service provides MPs and their staff with the impartial briefing and evidence base they need to do their work in scrutinising Government, proposing legislation, and supporting constituents.

As well as providing MPs with a confidential service we publish open briefing papers, which are available on the Parliament website.

Every effort is made to ensure that the information contained in these publically available research briefings is correct at the time of publication. Readers should be aware however that briefings are not necessarily updated or otherwise amended to reflect subsequent changes.

If you have any comments on our briefings please email papers@parliament.uk. Authors are available to discuss the content of this briefing only with Members and their staff.

If you have any general questions about the work of the House of Commons you can email hcinfo@parliament.uk.

Disclaimer This information is provided to Members of Parliament in support of their parliamentary duties. It is a general briefing only and should not be relied on as a substitute for specific advice. The House of Commons or the author(s) shall not be liable for any errors or omissions, or for any loss or damage of any kind arising from its use, and may remove, vary or amend any information at any time without prior notice.

The House of Commons accepts no responsibility for any references or links to, or the content of, information maintained by third parties. This information is provided subject to the conditions of the Open Parliament Licence.