Pre-packs and conflicts

Re Ve Interactive Ltd (in administration) [2018] EWHC 186 (Ch)

Key points

Potential conflicts will arise for insolvency practitioners ("IPs") when acting on a pre-pack sale back to management
IPs should ensure full co-operation and disclosure from directors to enable a fair and robust marketing which demonstrates best value
Conflicts must be actively and regularly reviewed and decisions documented

Facts

Insolvency practitioners advised the management of a distressed tech company prior to taking appointment as administrators and completing on a pre-pack sale of the business back to a company incorporated by a number of the former management team. The administrators struggled to obtain information from the directors regarding the extent of assets being sold and financial information in relation to the company but nevertheless completed the pre-pack sale.

Creditors brought an application to have the administrators removed on the grounds of conflict of interest and argued that independent administrators were required to investigate potential claims against the directors and/or the IPs in relation to the pre-pack sale and whether, amongst other things, it had been at an undervalue.

Decision

The court ordered the removal of the IPs. While not expressing any view on whether the sale had been at an undervalue or there any been any breach of duty, it held that in the circumstances, particularly in light of the lack of information provided by management and the potential for management to gain an unfair advantage through the process, independent administrators were required to investigate the pre-pack and directors' conduct.

Comment

Given the inherent conflict which can arise in advising prior to any pre-pack and also taking appointment to complete a pre-pack sale, IPs should be very alive to these risks and pro-actively review and document their processes and decisions. IPs should ensure that they receive adequate information from management to enable an appropriate marketing process and continually review SIP16 requirements to satisfy themselves that they will be discharging their duties following appointment.