Key to the reforms, which comes in response to Teresa Graham’s review of pre-packs last year, is an independent “pool” of experts whose brief will be to review the acquisition of a business through a pre-pack sale, at the request of directors, shareholders and others connected with the insolvent company who are hoping to buy it.
Pre-packs involve arranging the sale of a struggling business before it is put into administration which is then completely shortly afterwards by the administrators. While pre-packs do have economic benefits, such as saving jobs, in the past they have proved highly contentious, not least when the sale is to so-called “connected parties” or people already involved in the business.
“Pre-pack administrations are an important part of the economy, helping rescue businesses and jobs,” said Duncan Grubb who is director of Pre-Pack Pool Ltd, the organisation that will run the pool.
“Business owners and creditors, however, need to trust and have confidence in the process, which is why big steps are being taken to improve transparency.”
The pool will comprise 20 independent senior business experts who will deliver a response within 48 hours. Their opinion will not be binding but will be made available to creditors once the business sale has gone through. This transparency, Grubb believes, “will reassure creditors about the reasonableness of the pre-pack transaction and its justification in the circumstances”.
The connected party will pay £800 plus VAT for each application.
As well as the new review pool, the package of reforms includes guidance for directors on valuations and marketing proposed pre-packed businesses to third parties to get a better deal for creditors.
There are also amendments to SIP 16 which will require insolvency practitioners to include in the SIP 16 report to their licensing body whether the purchaser approached the pre-pack pool and what the outcome was.
Teresa Graham welcomed the changes. “The added confidence that creditors will gain from the independent scrutiny by experienced business people of connected party pre-packs, will transform trust in pre-pack insolvency as a form of business rescue.
“I am delighted that the government, insolvency profession and creditors have delivered these reforms and I am hopeful that those contemplating a connected pre-pack will make full use of the voluntary elements.”
A number of interested bodies – including ICAEW, ICAS, ACCA, the Insolvency Practitioners’ Association and R3, among others – were involved in drafting the reforms which follow Graham’s recommendations.
ICAEW director Bob Pinder urged insolvency practitioners and directors involved in pre-pack sales to use the pool. “These changes are vital for preserving pre-packs and telling the business community and government that insolvency practitioners don’t work behind closed doors.
“We want to help make this process more transparent so insolvency practitioners can continue to save jobs, costs and maximise returns to creditors.”
R3 president Phillip Sykes hailed the reforms as “an important development for the UK’s business rescue landscape”.
He pointed out that although there are relatively few pre-packs every year (out of 20,000 businesses that went through an insolvency process in 2014, fewer than 5% involved a pre-pack, and of those around two thirds involved connected parties), they had a “disproportionately big impact on the perception of the insolvency regime”.
“Taken together, the reforms will help to ensure pre-packs can continue to make an important contribution to the UK’s insolvency regime, which is ranked as one of the world’s best by the World Bank,” he added.