A 'pre-pack' is when an insolvent company is put into administration. Then, almost immediately, its business or any remaining assets are sold to a buyer. The process can be very controversial. Often the first occasion a creditor, who has supplied goods to the company, finds out that he will not be paid is after the sale. When, as often happens, the business or assets are sold to the owners of the insolvent company who acquire them debt free, the unpaid creditor can understandably feel very aggrieved.

An administrator does not need the consent of unsecured creditors or the approval of the Court before agreeing a pre-pack.

In January 2009, the Insolvency Service issued new guidelines on pre-packs in response to creditors' concerns. The administrator now has to disclose the details about the sale, including how the price of the business or assets was calculated. Although not legally binding, a failure by an administrator to comply with these guidelines will assist creditors to mount a legal claim against the administrator in misfeasance.

The Insolvency Service now also has a pre-pack complaints hotline. Administrators could face regulatory or disciplinary action if they fail to comply with the guidelines.

Often however the best way for creditors to protect themselves against a pre-pack administration is to have their goods excluded from the pre-pack. This can be done by incorporating in the contract for the supply of the goods, as a standard term, a clause providing that ownership of the goods would not pass until the goods are fully paid for. This 'retention of title' clause means that the administrator will not have good title to the goods and therefore cannot sell them as part of the pre-pack.

If you require any further advice or assistance please contact Wendy Beach or a member of the Litigation team at Wortley Byers on 01277 268321 or wbeach@wortleybyers.co.uk.

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