Government pre-pack review is an opportunity for improvement

Insolvency and restructuring trade body, R3 has responded to the Insolvency Service’s announcement that the government is to undertake an assessment of the Graham reforms of pre-pack administrations.

Duncan Swift, deputy vice president at R3 said “The Government’s review is expected and is a good opportunity to examine the role pre-pack administrations play in the UK’s business rescue landscape. At the end of this review, the Government must decide whether or not to exercise its power to ban any sales from any administration – not just pre-packs – to a connected party. This power expires in 2020. The insolvency and restructuring profession understands the frustrations that exist with pre-packs, but to lose the ability to make a sale to a connected party would have a serious impact on business rescue in the UK. However, this does not mean there is no room for continued improvement on pre-packs.”

“Pre-packs are a valuable business and job rescue tool and are beneficial to creditors, but, to work properly, pre-packs must have the confidence of all stakeholders. The 2014 ‘Graham Reforms’ were a welcome attempt to boost that confidence. Two years on from their introduction it’s clear that some elements of the Graham reforms have worked better than others: the new rules of valuations and marketing for potentially pre-packed businesses seem to have gone down well.”

“Other, more visible, aspects of the reforms may still need some work. The volume of referrals to the Pre-pack Pool by connected party purchasers has been disappointing, for example. The Government should look at making referral to the Pool mandatory for connected party purchasers, while insolvency practitioners should be allowed to provide information to the Pool to make sure reviewers have the complete picture when assessing a pre-pack deal. There is value in the Pool being used to provide extra assurance to creditors beyond the assurance already provided by a licensed insolvency practitioner. But the Pool has to be used for it to be useful.”

“Without pre-packs, it would be harder to rescue businesses and more jobs would be put at risk. It must be remembered that pre-packs may only be used when a company is insolvent and a pre-pack would get the best deal for creditors. Without pre-packs, creditors would lose money.”

Pre-packs guide:

• A ‘pre-pack’ administration is where the sale of all or parts of a business is arranged before it enters administration. The sale is completed shortly after an administrator is appointed.
• A ‘connected party’ pre-pack is where an entity connected to the insolvent company (e.g. its directors) purchases the company’s business or assets.

The Pre-pack Pool (from the Pool’s annual report)

• The Pre-pack Pool was launched on the 1st of November 2015 following the recommendations of the Graham Review of ‘pre-pack’ administrations.
• The Pool is a body of experienced business people who will provide an opinion on the proposed sale of a company and/or its assets to a connected party. This opinion may be made available to creditors at a later date.
• The aims of the Pool are to increase the transparency of connected party pre-packs and to provide assurance for creditors that independent business experts have reviewed a proposed connected party pre-pack transaction before it is completed.
• One member of the Pool will review any application and they will offer one of three opinions on the proposed sale:

1. The case for the pre-pack is not unreasonable;
2. The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided;
3. The case for the pre-pack is not made. The Pool’s opinion can be made available to creditors as part of a ‘SIP16’ report.

• It is the responsibility of the connected party purchaser to submit an application to the Pool. Use of the Pool is not compulsory. When a pre-pack sale to a connected party is proposed, an insolvency practitioner should inform the purchaser of their ability to approach the Pre-pack Pool.