New Pre Pack Pool Aims to Cleanse the Muddy Waters of Pre-packaged Insolvency

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Introduction

Following a review in 2014 which highlighted the need for greater transparency for creditors caught up in pre pack sales, a revised version of the Statement of Insolvency Practice (SIP 16) came into effect on the 1 November 2015.  The headline reform in the new guidelines is the introduction of Pre Pack Pool Ltd, an organisation designed to govern a pool of 20 independent senior business experts who will review pre-pack deals at the request of prospective purchasers and provide an assessment on the appropriateness of the sale.

Pre Pack Administration

“Pre-pack administration” is the term used to describe the process whereby a company is placed into administration before its business (or sometimes just its assets) are immediately sold by the administrator under a sale that was arranged prior to the administrator’s appointment.  Pre-packs can enable the relatively swift transfer of a business to a new owner and consequently minimizes the corrosive effect that insolvency can have on a business’s value and the confidence of its suppliers, customers and employees.  Indeed, pre-packs are regularly credited with saving jobs by helping a business to continue to trade (in the short term, at least).

The cost of these benefits, however, is often felt by unsecured creditors who can be unware of the pre-pack sale and therefore have no opportunity to protect their interests.  Administrators can after all sell the assets of the company before the proposals have been agreed by creditors.  This has led to accusations that the pre-pack process is open to abuse, with some labelling the scheme as an opportunity for unscrupulous businesses to cherry pick the profitable parts of their otherwise failing operation, drop their debt, and leave creditors in the lurch.

New measures

The new measures are designed to ease these concerns and establish trust in the pre-pack insolvency method by introducing mechanisms to demonstrate the appropriateness (or otherwise) of a pre-pack deal in each individual case.  Insolvency practitioners should inform any potential purchasers who are also connected to the business (for example, directors) of the pre-pack pool service, which can then be applied to via a secure online portal at www.prepackpool.co.uk at a cost of £800 + VAT.

The pool will then assess the evidence provided and within 48 hours issue one of three responses: ‘the pre-pack is not unreasonable’, ‘the case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided’, or ‘the case for a pre-pack is not made out’.  Creditors can, in turn, be informed of the outcome of the review by the administrator and therefore have prior knowledge of the pre-pack, along with an insight into whether it will be prudent to trade with the new company.

In addition to the pre-pack pool, the reforms include new marketing guidelines which implore businesses to demonstrate to their creditors how the company was effectively marketed to third parties, along with additional disclosure requirements relating to the source of an administrator’s involvement and details of asset valuations.

Comment

It remains to be seen whether the reforms have the desired effect and improve trust and confidence in the undoubtedly valuable pre-pack option.  The pre-pack pool is, after all, voluntary and operates on a ‘user pays’ basis – one might therefore ask why any connected persons looking to make hay out of a pre-pack deal would sign up.  The hope is that the stigma associated with a lack of a pre-pack assessment will encourage connected party purchasers to comply.  We therefore recommend that businesses heed the guidelines and approach pre-packs in the right spirit, as it could be likely that an absence of a pre-pack pool assessment could ultimately deter other businesses trading with them in future.

If you have any queries about pre-pack administration or require assistance on any other Corporate and Restructuring matters, please do not hesitate to contact me at pauline.rigby@forbessolicitors.co.uk or on 0800 321 3258.

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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