What has been the position to date?
The outcome of the Teresa Graham report on pre-packaged administrations in 2014 saw the introduction of the ‘pre-pack pool’, an independent body of experienced business people who will offer an opinion on the purchase of a business and/or its assets by connected parties to a company where a pre-packaged sale is proposed. If viewed favourably, the pre-pack pool member(s) will issue a response to the effect that it is not in their opinion unreasonable to proceed.
The purpose of the pre-pack pool was to improve confidence and transparency in the pre-pack administration process. With the effectiveness of the pre-pack pool being widely criticised in the insolvency profession since its introduction, the number of applications to the pre-pack have been much lower than anticipated. The main reason for this is that its use is optional. The proposed administrator is merely obliged to advise the proposed purchaser of the pre-pack pool’s existence and what its purpose is. With many purchasers in a pre-pack administration scenario typically being the existing directors or connected parties, it is perhaps of little surprise that so few opted to involve the pre-pack pool in the process.
What are the new rules being proposed?
It has been recently announced by the Government that measures will be introduced requiring mandatory independent scrutiny of pre-pack administration sales where connected parties are involved in the purchase.
Minister for Climate Change and Corporate Responsibility Lord Callanan said “This government is committed to creating a transparent and fair insolvency framework, and helping distressed businesses explore all options to get themselves out of trouble. Pre-pack sales are a really useful tool to help save troubled, but viable, businesses, and play a critical role in helping to protect our economy and preserve livelihoods.
“As the UK continues to tackle Covid-19 it is more important now than ever that people can take confidence in the insolvency process. Connected parties such as existing directors or shareholders who know the company well can be ideal buyers. But in the rush to secure a sale, creditors’ needs should not be forgotten. The new law we are introducing will ensure such deals are properly scrutinized, to help balance the interests of everyone involved.”
Draft regulations have been published for comments until 5 November 2020. The actual date of implementation of the proposed legislation has yet to be confirmed.
Would you like some further information?
If you or a client were considering a possible pre-packaged sale as part of an administration and would like to learn more in respect of these new proposed regulations, please contact us.