Moss Groundworks Ltd, Re The Insolvency Act 1986

Before making an administration order involving a proposed pre-pack sale, the court must be satisfied both that the company is, or is likely to become, insolvent and that administration is reasonably likely to achieve an administration purpose.

The court must scrutinise the proposed transaction and remain alert to possible abuse causing disadvantage to creditors. The evidence should explain the marketing strategy, its compliance with SIP 16, and why the proposed sale represents the best available outcome. A brief marketing exercise, particularly for a sale to connected directors, may be insufficient. An administration order does not ordinarily amount to judicial approval of the substance of the pre-pack sale.

The directors applied for an administration order under paragraphs 11 and 12 of Schedule B1 to the Insolvency Act 1986, proposing the appointment of two joint administrators.

The company was insolvent or likely to become insolvent. The proposed administration involved marketing the business and assets, with the only offer coming from a company connected with the directors. The evidence disclosed a highly truncated marketing process and provided limited explanation for the proposed consideration.

The issue was whether the statutory conditions for administration were satisfied and whether the court could properly exercise its discretion on the evidence supplied.

1. The court was satisfied that the company was, or was likely to become, insolvent, satisfying paragraph 11(a) of Schedule B1 to the Insolvency Act 1986. It also had to be satisfied under paragraph 11(b) that administration was reasonably likely to achieve an administration purpose under paragraph 3.
2. The relevant proposed purposes were achieving a better result for creditors as a whole than liquidation, or realising property for secured or preferential creditors. A pre-pack application requires careful scrutiny because speed and secrecy may produce a transaction convenient to the directors or insolvency practitioner but disadvantageous to creditors.
3. Following the approach in Re Kayley Vending Ltd [2009] B.C.C. 578, the court should be alert to obvious abuse and should require information sufficient to evaluate the proposed transaction. The information normally required by SIP 16 should be included in the application where known or ascertainable.
4. The marketing exercise had lasted at most about 48 hours, produced no independent interest, and resulted in an offer from a company connected with the directors. The report did not adequately explain compliance with the marketing essentials in SIP 16, the absence of pre-pack pool consultation, or why assets with a book value exceeding £1 million should be sold for £130,000, largely payable later.
5. The court therefore declined to make an administration order on the evidence then available. The application was adjourned briefly to allow the company and proposed administrators to reopen the marketing process and provide further evidence. Any subsequent administration order should not ordinarily be understood as judicial approval of the terms or substance of the proposed pre-pack sale.