Plans to increase the scrutiny around the use of pre-pack administrations will hopefully enhance confidence about them in the business community while allowing for their continued use in saving struggling firms and the job they sustain.
That’s the view of Alexandra Withers, North East chair of insolvency and restructuring trade body R3, after the government announced its intention to enhance transparency in this part of the UK’s corporate insolvency framework.
The new laws will also require mandatory independent scrutiny of pre-pack administration sales where connected parties, such as the insolvent company’s existing owners, directors or shareholders, are involved in the purchase.
This is in addition to existing regulations which require insolvency practitioners to explain to creditors why the pre-pack took place, including why it was a better option than alternatives.
A pre-pack is where the sale of a company’s business and/or assets is arranged before the start of an insolvency procedure then completed immediately or shortly after the procedure begins. Proceeds from the sale are used to repay the company’s creditors.
Of the 473 pre-pack deals completed in the UK in 2019, more than half (260) involved a sale to a connected party.
Alexandra Withers, who is an associate solicitor in the insolvency department of Short Richardson & Forth Solicitors in Newcastle, says: “It’s good to see the government recognising the important role that pre-pack sales play in rescuing viable businesses, protecting jobs and supporting our economy, and we broadly welcome its move to make their use as fair as possible to all parties.
“Pre-pack administration sales involving connected parties are an important rescue tool as they are often the best way of preserving a business and maximising returns to creditors.
“The insolvency and restructuring profession is already very sensitive to the impact of pre-packs on creditors, and there is a careful balance to strike in these situations between transparency, protecting creditor value, and business rescue, which these new proposals support.”
“Used responsibly, pre-packs are a key tool for saving both struggling businesses and the jobs that they support, and while these reforms aren’t perfect, they should help to improve confidence in this important business rescue process.”