The spotlight is now back on the role of directors in pre-pack deals following the English High Court's recent decision on the fiduciary duties directors owe following a company's insolvency. Walkers partners Nigel Sanders, Adam Cole and Gavin Smith consider how those principles translate in the Channel Islands and Ireland.
In Hunt (As Liquidator of System Building Services Group Ltd v Michie & Ors  EWHC 54, Insolvency and Companies Court Judge Barber said directors' duties are "independent of and run parallel to the duties owed by an administrator or liquidator appointed in respect of the company". The judge ruled that a company director's purchase of residential property from the company's administrator at a "significant undervalue" had not been in the interests of creditors.
The company's liquidator, Stephen Hunt, wrote following the decision that it would have an "obvious effect" on how pre-pack sales to directors are approached.
Pre-packs are an established, albeit infrequently used, part of the insolvency process in Guernsey and Jersey. The statutory regime does not require the court's express approval of the detailed arrangements that would follow a winding-up order in Jersey or an administration or liquidation order in Guernsey. However, the courts in both islands have recognised that, at least by implication, the regime could give the impression of requiring it. This gives rise to an expectation that applicants will address the special concerns and issues that can arise with a pre-pack.
In Re Collections Group  JRC096) the only reported example in Jersey, the Royal Court was clear that, in giving the liquidator (being appointed on just and equitable grounds) power to enter into a pre-pack arrangement, it was for the liquidator to exercise his judgment as to whether "the terms of the agreement are in the interest of creditors or not". In granting the winding up order in circumstances where its purpose was to permit the liquidator to enter a pre-pack agreement, the court was concerned to ensure that it was not effectively supporting some form of "Phoenix" arrangement whereby a new company owned by the same or similar shareholders would emerge with the assets of the business but free from the claims of creditors. In granting the orders the Royal Court took account of the guidance on pre-packs in Statement of Insolvency Practice 16 (SIP16).
In Esquire Realty Holdings Limited, the Guernsey Royal Court specified that the SIP16 regime should be adhered to unless there are "overwhelming reasons not to do so". This guidance was followed by the introduction of a number of Guernsey Insolvency Practice Statements (GIPS) that set out best practice principles and compliance standards, with GIPS5 effectively mirroring the provisions of SIP16. The Guernsey courts are conscious of the potential for a "Phoenix" arrangement, and in Esquire noted the comments of the Jersey Court in Collections Group on that point.
In Ireland, the usage of pre-pack insolvency sales is less developed than in other jurisdictions, but there has been an increasing number of asset sales structured through pre-pack receiverships in recent times (and also a small number of what you might call "pre-packaged" examinerships). However, there is no current legislative basis for a pre-packaged sale. Furthermore, unlike England and Wales where IPs must hold a licence, there is no equivalent of SIP16.
In the absence of such guidelines, IPs need to bear in mind their statutory obligations in considering the appropriateness of a pre-pack. A receiver must ensure he or she obtains the best price reasonably obtainable for the assets at the time of sale. Furthermore, in the context of directors, a receiver is not permitted to sell a non-cash asset by private contract to a person who was an officer of the company within the last three years, unless the receiver has provided at least 14 days' notice to all the company's known creditors. Similarly, an examiner (who is appointed by and is an officer of the court) has a duty to ensure that the investment he or she recommends is in the best interests of the company, and its members and creditors as a whole. This means he or she will be required to follow a process of testing the investment options available before finalising proposals for an examinership scheme of arrangement.
Directors in all three jurisdictions should therefore remain mindful of the need, upon the occurrence of insolvency or the company bordering on insolvency, to have paramount regard to the interests of the company's creditors. In this light, it is also worthy of note that imminent changes to Guernsey's insolvency legislation will impose a duty upon office holders to report delinquent directors. This may give greater relevance to the requirement for a clear demarcation between pre- and post-appointment roles and the benefits of board members seeking early independent advice.
This piece was first published by Global Restructuring Review.
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