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Business Recovery & Insolvency

Pre-pack administration survives HMRC claim

By CreditMan Monday, September 17, 2007

A Judge in the High Court has ruled in favour of using a pre-packed administration to save a business and jobs even though it meant going against the wishes of the major creditor.

The judge rejected a claim by HMRC against the sale of DKLL Solicitors when DKLL made an application to the court to be placed into administration. This was to allow an immediate sale of the business to another firm of solicitors, Drummonds Kirkwood LLP.

Andrew Simmonds QC, acting as Judge of the High Court, rejected HMRC’s proposal and granted the administration order. “I am particularly influenced by the fact that the proposed sale appears to be the only way of saving the jobs of the 50 odd employees of the partnership. The proposed sale is also likely to result in the affairs of the partnership's clients being dealt with, with the minimum of disruption.”

There are two main areas in which this ruling is significant. Inferentially, the judge did not declare the pre-pack strategy unlawful, thus validating it as a legal rescue tool.

Dr Sandra Frisby[1] has written recent research into pre-packs, sponsored by R3 – The Association of Business Recovery Professionals. Her research shows a significant increase in the number pf pre-packs carried out post the Enterprise Act 2002. Dr Frisby said “

“The fact that creditors were ‘disenfranchised’ was explicitly made but was not considered of itself sufficient to prompt the court to refuse to make the order. This case might therefore be taken as tentative authority to the effect that the pre-pack strategy is a lawful one.”

Secondly, there is a clear indication of a ‘business judgment’ approach in the judge’s statement that the court will, in applications for the granting of an administration order, “give weight to the expertise and experience of impartial insolvency practitioners.” [2]

This may be of considerable importance if, at some future date, a pre-pack sale gives rise to challenge. The case demonstrates that the court may be prepared to grant an administration order to affect a pre-pack, and may do so despite the opposition of a major creditor.

[1] Baker & McKenzie Lecturer in Company and Commercial Law at Nottingham University.

[2] Para. 10 of the ruling.