Implications of the recent decision of the High Court in Re Global Trader Europe Limited (In Liquidation) regarding the application of the FSA’s client money rules.

Summary

A recent court decision confirmed that transparent pre-pack sales can be used where they are in the best interests of the creditors as a whole. The court ruled that:

The Pensions Regulator recently became involved in the current controversies attaching to pre-pack arrangements.

An employment appeal tribunal has ruled that TUPE does not apply to all sales by administrators. On this view, whether TUPE applies will depend on the objectives of the administrator when appointed. In this case it was clear from the outset that continuing to trade was not viable and an immediate sale of the company’s assets was required to secure the best outcome for creditors. That put the administration in the category of “terminal” insolvency proceedings, for which a complete exemption from TUPE applies.

The company voluntary arrangement (CVA) is a relatively obscure insolvency procedure whose use has traditionally been overshadowed by administration. A CVA is essentially a contract between a company and its unsecured creditors which sets out the terms on which the company can continue trading. Implementation of a CVA requires the approval of 75 per cent of creditors by value, who vote on the proposal.

There are two main reasons why CVAs are likely to be used more widely in the future:

When can shareholders also have employee status?

In the Budget, the Government announced two consultation processes aimed at breathing new life into the rescue culture.

The Insolvency Service intends to consult on the desirability of super-priority status for funding to companies that are in administration or that are subject to a company voluntary arrangement. Such a super-priority would allow lenders to participate in the restructuring and recovery of such companies to a greater degree.

"Leaving the mice in charge of the cheese..." is how one commentator described the now far from unusual phenomenon of the pre-pack administration sale. But what is meant by a "pre-pack"; are they lawful and what is the legitimate area for concern? While they were fairly uncommon in the past, pre-packs now seem to have become all the rage. Why? What scope is there for challenge or review if abuse is suspected?

What is a "pre-pack"?

The FSA has published a statement entitled Wider implications referral: Lehman-backed structured products.  

In the statement the FSA together with the Financial Ombudsman Service have jointly concluded that the Lehman Brothers’ insolvency raises issues in the UK structured products market.  

It has been agreed that the FSA will now consider issues relating to Lehman-backed structured products under “the wider implications process” in order to allow it to explore all options to achieve the best outcome for consumers.  

Company Voluntary Arrangements ("CVAs") have been in the news recently for all of the right reasons. The CVA proposal advanced by JJB Sports was approved by an overwhelming majority of creditors. This has allowed the survival of JJB Sports (JJB) in its current form and allayed fears that the company would be forced into administration or liquidation with consequent job losses and further detriment to creditors.