Pre-packs boosted by High Court decision

The case dealt with a company named DKLL Solicitors, which HM Revenue & Customs wanted to wind up in an attempt to receive money owed through a liquidation.

However, administrators from BDO Stoy Hayward argued that a liquidation would see the taxman receive very little of the £1.7m owed to it. Instead the administrators had lined up a sale of the business worth £400,000 prior to administration in a ‘pre-packaged’ deal.

HMRC argued that it should be allowed to block the sale where the courts knew that the taxman was the major creditor and it opposed the pre-pack.

Andrew Simmonds QC, sitting as judge, said that the administrators’ plan seemed the best way to safeguard the solicitors’ 50 jobs and would protect its clients’ interests.
‘I am particularly influenced by the fact that the proposed sale is also likely to result in the affairs of the partnership’s clients being dealt with, with the minimum of disruption,’ said Simmonds.

Insolvency trade body R3 stated that the ruling showed that administrations could be granted, even when opposed by a major creditor, as the judge decided to give weight to the fact that the pre-pack was formed impartially from insolvency practitioners’ expertise and experience.

Halliwells partner in corporate recovery Carolyn Swain said the case had wider implications beyond pre-packs, as the court could now be used as a backstop if the majority creditor didn’t like the insolvency practitioners’ plans.

‘Even if the majority creditor is unhappy the court can overtake them if happy with [the practitioners’ plans],’ said Swain.

‘Size doesn’t matter,’ said Simon Allport, partner in corporate restructuring at Ernst & Young. ‘It’s interesting that a majority creditor doesn’t necessarily have the right to dominate.’

He was especially pleased that the judge backed the pre-pack plan over HMRC’s attempt to liquidate, backing pre-packs, and also that that decision was partly based on the practitioners’ expertise in handling professional services insolvencies.

‘It gives pre-packs further validity. Experience was also a factor in the decision, which is refreshing to see,’ he said.

Read the judgment at www.bailii.org