Pre-Pack Insolvency Deals Reviewed by Business Minister Jenny Willott

On 16 June 2014 the Business Minister, Jenny Willott, announced new recommendations which will make sure businesses and customers get a better deal from failing companies.

In July 2013 Theresa Graham CBE launched an independent review into ‘pre-pack’ insolvency deals.  The review identified the need to improve public confidence in the insolvency system and found that changes are needed to increase both the transparency and financial returns of “pre-pack sales”.

‘Pre-pack’ is a term used to describe the process through which a company is put into administration and its business or assets immediately sold under a sale which was arranged before the administrator was appointed.  The sale is then completed at, or shortly after, the start of the administration.  It is estimated by the Insolvency Service that around 60-70% of these sales are to connected parties – typically the former directors or owners of the business.

The review undertaken by Theresa Graham CBE highlighted concerns that these particular types of sales were not always transparent or fair as unsecured creditors often do not realise that a ‘pre-pack’ is going to happen and so have no opportunity to protect their interests.  Furthermore, sales to connected parties were often found to leave the creditors worse off, with the new business also less likely to succeed than if it had been sold to a third party.  The review also acknowledged the need to improve public confidence in this aspect of the insolvency system.

The recommendations aim to improve the results for creditors without imposing undue costs. The recommendations include creating a “pre-pack pool” where details of a proposed sale to a connected party can be shown to an independent person before the sale takes place, this will increase transparency and give greater confidence to creditors that the deal has undergone independent scrutiny.  Further recommendations are to request connected parties to complete a ‘viability review’ for the new company to improve its chances of success and requiring valuations to be carried out by a valuer who holds professional indemnity insurance, this should increase confidence that the sale is for a fair price.  It is also proposed that proper marketing should be undertaken in order to maximise the sale proceeds.

Business Minister Jenny Willott has said that she hopes the recommendations will “ensure people get back as much money as possible and make ‘pre-pack’ deals more transparent.  We will be working with businesses and the industry to implement these recommendations in full and we believe it will help restore trust and confidence in pre-pack deals.  We will monitor progress closely and will take the power to legislate if necessary.”

The recommendations have also been welcomed by various organisations including the Institute of Chartered Accountants who say they “are happy to engage with the Government to make these proposals work in order to maintain the ‘pre-pack’ as a legitimate tool of the UK’s rescue culture.”

It is of course a matter of wait and see as to how the measures are implemented and how the insolvency industry respond to these changes.  Theresa Graham has invited the insolvency industry to adopt these measures voluntarily, without the need for new legislation, but has asked the Government to monitor the measures and adopt legislation if they are not introduced or fail to have the desired impact.

The Business Law team at Forbes can offer advice on all insolvency matters, please do not hesitate to contact them on 0800 037 4628.

Pauline Rigby

About Pauline Rigby

Pauline Rigby is Head of the Corporate and Restructuring team at Forbes Solicitors. Pauline’s blogs cover a wide range of corporate issues, specifically areas including company formation, banking, joint ventures and shareholder matters, contractual matters and equity fundraising or investing.

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