The Government recently announced that there will be an independent review of the controversial insolvency vehicle called pre-pack administration.
According to the Government’s own Insolvency Service, pre-packs can be a ‘highly effective process’ to ensure the best deal for creditors, preserve value and safeguard jobs, as they allow for the sale of a business and its assets to be arranged prior to the onset of formal insolvency and to then take place as soon as, or shortly after, the administrators are appointed.
However, there have been concerns over the lack of transparency in pre-packs and a recent report by the Department for Business, Innovation and Skills (BIS) called for greater openness and higher levels of compliance to make sure rules are not being abused.
The practice is controversial because unsecured creditors can be left with nothing and the buyers are sometimes directors of the company or connected parties.
In 2011, the Insolvency Service estimated that 25 percent of the 2,808 companies that entered administration that year used the pre-pack procedure and that nearly 80 percent of pre-pack sales were to connected parties.
The Association of Business Recovery Professionals, R3, also suggests that as part of the review, creditors should be granted the option to appoint an independent liquidator to allow the sale to be properly assessed and for wrongdoing by any party to be tackled. This could improve the confidence of creditors in the pre-pack process. Since pre-packs fare considerably better than alternatives in terms of the retention of jobs and returns to secured creditors, viable businesses should be given a second chance.
The industry is therefore keen to ensure that any changes do not risk crippling what it considers to be a useful and effective process.
At Palmers, we specialise in all aspects of debt and insolvency, and can provide expert guidance on making the best use of pre-pack administrations.