Re Kayley Vending Ltd

Facts

Kayley Vending Ltd was in the business of running cigarette machine vending machines in public houses. Facing cash flow problems arising from the ban on smoking in public houses, the company was unable to pay £79,000 in taxes that were then owing to HM Revenue and Customs. The directors faced a winding up petition by HMRC, and sought to enter into a company voluntary arrangement. HMRC rejected that proposal, but took no position as to the directors applying to court for an administration order under the Insolvency Act 1986. This the directors did, contemplating a pre-packaged administration which had been negotiated with the insolvency practitioners and the company’s two principal competitors, who were prepared to buy the business as a going concern. The proposed administrator believed that they would be the most likely purchasers and would be prepared to pay most for the assets.He contended that, if the company were to go into liquidation and the machines could not be serviced, they could not be sold in their present locations and would have to be removed and sold separately at a much lower value.

Judgment

HH Judge David Cooke held that the administration had a reasonable prospect of achieving a better return, and granted approval. Applicants for a prepack administration should provide sufficient information for a court to see that a prepack deal is not being used to disadvantage creditors. Furthermore, a proposed administrator’s costs may be counted as an expense of liquidation, and so it was here where the costs were incurred for the good of the creditors as a whole. It would not be so if a prepack sale was to the management, rather than an arm’s length purchaser. In the course of his judgment he discussed the concerns about pre-pack admininstrations.

Current guidance notes for the insolvency profession should not put any undue burden or expense on the proposed administrator to provide much or all of the information required to the court at the time the application for an administration order is made.

The main reasons why a prepack may be considered inappropriate or ineffective would include:

A corollary of one of the advantages claimed for the pre-pack is that there may be difficulty obtaining funding in order to enable the administrator to continue to trade whilst he negotiates a sale of the business. If the negotiation process takes place before his appointment, and the business is continuing to trade in that period, there is an obvious risk that credit incurred in that period will not be paid so that the negotiation takes place at the expense of the creditors.

The concerns of those outside the process have been expressed elsewhere more forcefully:

A general summary of these concerns would be that the speed and secrecy which give rise to the advantages claim for pre-packs may too easily lead the directors and the insolvency practitioner to arrive at a solution which is convenient for both of them and their interests (perhaps also satisfying a secured creditor who might be in a position to appoint his own receiver or administrator), but which harms the interests of the general creditors because:

it may not achieve the best price for the assets

credit may be incurred inappropriately in the pre-appointment period

they are deprived of the opportunity to influence the transaction before it takes place, and

having been presented with a fait accompli, they have insufficient information to make it worthwhile investigating and challenging the decisions taken.