Sunday, 22 March 2015

Sales out of Administration to Connected Persons

This is part of a series of blogs on the Small Business, Enterprise & Employment Bill (“the Bill”) that is proposed to come into force in April 2015

Section 117 of the Bill seeks to incorporate more future regulation of Administrators. These provisions set down authority for the Secretary of State to introduce statutory instruments to regulate the sale of company businesses out of Administration to “connected persons”.
The use of the out of Court process to appoint Administrators in recent years has lead to the publicly debated issue of insolvency and management buy outs, where companies are placed into administration, the business sold simultaneously (often referred to as a “pre-pack”) and the same management remain in control of the business, assets and goodwill, albeit under a different company number. At the same time all unsecured creditors are left with a claim in the administration and unsurprisingly feel a little disgruntled at the company’s apparent continued trading.
The public perception of this has always been that there has been some sort of fraud or deviance which has allowed management to take the best parts of the business away whilst not being accountable to unsecured creditors (some of whom may be heavily reliant on this relationship). This is often incorrect – the alternative could be far worse, management may be the only ones who know the business, are in a position to acquire it and the sum paid is usually the best outcome for creditors as a whole.
However, to combat the public criticism of this, the Bill allows the Secretary of State (currently Vince Cable) to introduce rules and regulations to control such sales, make the sale subject to creditors’ approval (primarily with an emphasis on unsecured creditors having a say) and generally provide an ability for unsecured creditors to more fully understand the process.
The ability to introduce these changes expires 5 years from commencement of the Act introduced (once the Bill has been approved by Parliament) and so this is expected to be introduced very shortly.
This concludes my blogs on the current contents of the Bill, but there will undoubtedly be many changes by the time it is introduced into legislation. If you would like to discuss any aspects of these blogs, please do not hesitate to contact me or my colleagues at Francis Wilks & Jones.