Government introduces company pre-pack sale scrutiny

The Government has announced new plans for laws that will require mandatory independent scrutiny of pre-pack administration sales where connected parties,  such as the insolvent company’s existing directors or shareholders, are involved in the purchase.

The new laws will improve confidence and transparency in pre-pack administration sales, giving the general public and creditors reassurance that their interests are being protected alongside that of the distressed business.

Pre-pack administrations involve arrangements to sell part or the whole of a company’s business or assets prior to the company entering into administration.

The sale is completed on or shortly after the appointment of an administrator and the speed of the transaction helps preserve the value of the business while saving jobs.

Pre-pack administration sales are widely considered to be a valuable rescue tool. However, concerns have been raised that arrangements may not always be in the best interests of creditors. For example, where the sale is made to a connected party, such as the company’s directors or shareholders.

Minister for Corporate Responsibility Lord Callanan said “Pre-pack sales play an important role in rescuing viable businesses while protecting jobs and supporting our economy.”

“As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process.”

“This new law will ensure all sales to connected parties are properly scrutinized – protecting the interests of creditors and the general public, as well as the distressed company.”

Colin Haig, President of insolvency and restructuring trade body R3, said “Having agreed that it should be mandatory for sales to connected party purchasers in pre-packs to be referred for an independent opinion, we broadly welcome the Government’s announcement. In particular, the Government’s decision not to ban sales to connected parties in pre-packs is the right one.”

“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 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 proposals support.

“We welcome efforts to enhance confidence and transparency in pre-packs, but these efforts should be balanced against protecting the valuable role pre-packs play. These reforms, while not perfect, should help to improve confidence in this important business rescue tool.”

“The insolvency and restructuring profession is 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 proposals support.”

Ion Fletcher, Director of Finance Policy, British Property Federation said “We support the Insolvency Service’s proposed measures to require independent scrutiny of sales in administration to a connected person. This will provide much-needed transparency and provide reassurance that a sale has been completed in a fair manner.”

The Government will introduce regulations into Parliament in due course.

Mandatory scrutiny of pre-pack administrations involving connected parties will inject some long-term credibility into the process while appeasing its critics, according to CVR Global. Brendan Clarkson, Insolvency Director at CVR Global, said “There is no doubt that pre-pack administrations have left many creditors out of pocket over the years, but the new law will ensure all sales to connected parties are properly checked – giving creditors and the public a clearer and trustworthy process.”

“This move by the government can only be a good thing for the long-term future of pre-pack administrations as they are an important rescue tool, and are often the most effective way of preserving a business and ensuring maximum returns to creditors.”

“Good restructuring professionals are always aware of the impact that any pre-pack sale is going to have on the various stakeholders involved and so will strive to strike a fair deal, but this move by the government is a much-welcomed vote of conference in what is an important insolvency process.”