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policing a pre-pack - considerations of the court on an application for pre action disclosure

18 January 2012

Court provides helpful guidance to administrators on what sale information must be disclosed to creditors after a pre-pack

The recent case of Maltby Holdings Ltd v Spratt and another [2012] provides administrators with an insight into which documents utilised in a pre-pack sale a court would consider disclosable to creditors with a potential claim against the administrators.

An application was made by Maltby Holdings Limited (MHL) for the disclosure of certain documentation (including valuations) by the Joint Administrators (JAs) in relation to a pre-packaged sale of Maltby Investments Limited (MIL) assets to Citibank (Citi). The application was made under CPR 31.16 and the courts inherent jurisdiction.

The court refused the application on the basis that the requirements for a pre-action disclosure order under CPR 31.16(3) had not been met and that disclosure of the documents was not necessary or even desirable to enable the companys creditors to pursue their claims.

Background

MHL was the parent company of MIL. MIL was the parent company of Maltby Aquisitions Limited (MAL) who in turn was the parent company of EMI Group Limited (EMI). MHL is owned and controlled by the general partners of Terra Firma (TF). TF acquired EMI in 2007 for about £4bn. This was financed in part by a £2.75bn debt package provided by Citi. In November 2010, Citi contacted MIL raising concerns as to their solvency. MILs only significant asset was a shareholding, giving indirect ownership of the EMI Group. MIL had debts of £3.3bn to Citi.

MIL and Citi undertook contingency planning which resulted in the agreement of a pre pack sale of MILs shares to Citi. The consideration of this sale was £200 and the release of approximately £3.13bn of debt. On 1 February 2011, the JAs were appointed and the sale completed.

This sale meant that TF incurred a loss of approximately £1.85bn. TF raised a potential claim against the JAs and their firm, PwC - either that the sale should not have taken place at all or that the sale was at an undervalue.

MHL sought disclosure and inspection of certain valuation reports and related documents to enable TF to obtain redress for its rights that had been seriously and improperly prejudiced.

Application under CPR 31.16

The court considered the test set out at CPR 31.16 - that the documents would have to be disclosed if proceedings had commenced and that the disclosure must be desirable to:

  • assist in achieving a fair disposal of the proceedings
  • assist the dispute to be resolved without proceedings
  • save costs

The court stated that whatever complaints TF may have about the appointment of the JAs or the sale of EMI to Citi, the only issues which could justify pre action disclosure of the valuations and other documents sought were issues which related to the value or valuation. The court concluded that the test at CPR 31.16 was not met. The claim turned on the value of EMI not how the valuers arrived at the valuations. TF did not need to know the methodology of the valuations to formulate their claim. TF did not agree with the valuations and had all the relevant financial information to instruct their own valuers to effect a valuation of EMI.

Application under the courts inherent jurisdiction

MAL sought to rely on Re Palmer Marine Surveys Ltd [1986] in which the court had exercised its discretion in relation to ordering the disclosure of documents. However, the court declined to follow Re Palmer stating that if the court had not exercised its discretion in that case, the creditor would have had no effective remedy to ensure that its rights were properly reflected. In contrast, in the current case the statutory procedures had been carried out properly and that MHL would be able to assert remedies to give effect to its rights as a creditor. The court found that disclosure of the documents sought was entirely unnecessary, at that stage, to enable MHL (or its parent company) to challenge the appointment of the administrators or the sale of the companys assets. Accordingly, they declined to exercise their inherent jurisdiction to order disclosure.

Conclusion

The judge in this case agreed with the legal representatives of MHL who had observed that the courts must be able to police pre-packs after the event. However, he noted that this policing must be carried out in accordance with the procedures laid down in the insolvency legislation (notably in this case SIP 16), "with such assistance as the inherent jurisdiction provides".

This decision will give administrators undertaking pre-packs some confidence in that it is clear that the courts will not simply order disclosure of documents after a sale unless a case under CPR 31.16 or the courts inherent jurisdiction is made out. The completion of the requirements under SIP 16 allows transparency to the creditors where a pre-pack has been undertaken and unless the court is convinced that further disclosure is required, it will not simply be ordered following an application by a creditor.

The case also highlights the requirement to ensure that administrators adhere to the guidance of SIP 16 to attempt to prevent any applications by creditors for pre action disclosure.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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