Published today, Graham has made a number of recommendations aimed at increasing transparency, fairness and providing the best value for creditors.
She said pre-pack administrations have a “unique place in the insolvency market,” but warned there must be “major changes in the way they are administered".
Pre-packs – where negotiations for the sale of a company’s business and assets take place before an administration and the sale executed immediately on the appointment of an administrator – have grown in popularity as a means of business rescue.
Last year, there were 728 pre-pack deals, accounting for 29% of all administrations. They are regarded as an important way of ensuring that key employees and contracts are not lost, as well as preserving the value of the business and returns to creditors.
However, questions have been raised about the procedure, especially where the business and its assets are sold back to the company’s previous owners or to a connected party, without an open market valuation, enabling them to leave behind unwanted debt.
The recommendations, announced by business minister Jenny Willott, centred on an independent “pre-pack pool” where details of a proposed sale to a connected party can be shown to an independent person prior to the sale taking place. “This will increase transparency and give greater confidence to creditors that the deal has undergone independent scrutiny,” said the review.
Other proposals included requesting connected parties to complete a ‘viability review’ for the new company to improve its chances of success and requiring valuations to be carried out by a valuer who holds professional indemnity insurance, to increase confidence that the sale is for a fair price.
In addition, ensuring proper marketing is undertaken in order to maximise sale proceeds.
“I believe my proposals, implemented as a complete package, will lead to real improvements in pre-packs. I hope the insolvency industry, as well as all those in business, will embrace these measures as it is in everyone’s interest that they are successful. I believe they will lead to real improvements in transparency and scrutiny,” said Graham.
Giles Frampton, president of insolvency trade body R3, said the report was an “excellent contribution to the pre-pack debate”.
“Debate around pre-packs has long suffered from a lack of empirical evidence. This report helps plug that gap.
“The report’s recommendations are innovative, measured and worth exploring. Balancing transparency and the need to protect the value of a business in difficulty is difficult to achieve: many of the review’s proposals may help redress this balance,” he added.
ICAEW executive director, professional standards, Vernon Soare, said the recommendations “tackle the myths about pre-packs”
“We are pleased the review shows that when pre-packs are done properly, they can bring big benefits to the UK economy because they save jobs and costs. However, we understand that those involved in insolvency proceedings need to trust the pre-pack process, which is why we support the review’s recommendations to improve its transparency.
“We specifically support the recommendations that directors should take more responsibility for the on-going viability of Newco and that there should be independent scrutiny of a deal before the event. We will be very happy to share our expertise to establish the proposed pre-pack panel,” he added.