When a pre-pack sale leads to conflict of interest

The English High Court has given judgment in a case which will be of interest to any jurisdiction that handles insolvencies. It highlights risks connected to ‘pre-packs’ and the importance of managing conflicts.

The case involves an insolvent company which was put into administration and sold the following day in a pre-pack sale to an entity incorporated by its directors, despite a number of potential issues with the pre-pack. One of those issues was the fact that the administrators, as insolvency practitioners, had provided advice to the directors before being appointed.

In VE Vegas Investors IV LLC & ors v Shinners & ors [2018] EWHC 186 (Ch), several creditors sought the administrators’ removal due to this apparent conflict of interest. The court agreed there’d been an ‘obvious’ conflict and ordered the removal.

Although the judgment doesn’t try to stop insolvency practitioners from providing advice before being appointed as administrators, it’s a reminder that they need to be clear who their client is.

And while the case was in the English courts, the issues it brings up are common to all offshore jurisdictions – indeed, anywhere English precedent is persuasive.

Pre-packs are an established option in Guernsey, and they can be fast, cheap and effective means of realising the assets of a distressed business. However, pre-pack sales may be open to criticism, particularly when the purchaser is connected to the company's existing management.

The judgment also talks about the importance of the UK Statements of Insolvency Practice (SIP) 16.

The principles of SIP 16 were adopted by the Royal Court of Guernsey in 2014, and SIPs are also supplemented by non-binding guidance from Guernsey Insolvency Practice Statements.

If the administrators in this case had adhered to these standards, they might have avoided many of the problems they later encountered.

While the failure to stick to industry standards is a little surprising, the judgment should serve as a reminder that insolvency practitioners need to be cautious in approaching pre-packs, keeping conflicts at front of mind.