Quick insolvency process could be slowed down

by Rachael Singh

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31 Mar 2011

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Edward Davey MP

A PROCESS CRITICISED for rushing through the sale of insolvent businesses could be slowed down under proposals from Business Innovation and Skills minister Ed Davey.

The proposal suggests allowing creditors three days to oppose the insolvency process, known as a pre-pack administration, compared to deals going through in just hours.

Pre-packs are shrouded in controversy because a business is marketed before entering administration and sold immediately after, leaving creditors with little or no time to question the deal. In many cases companies are sold back to connected parties such as the business' directors or owners.

In future, if a business is sold to connected parties they will be given three days to object to the sale, prolonging the process.

"In order to inject greater transparency into the process we intend to require administrators to give notice to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party, in circumstances where there has been no open marketing of the assets.

"This will enable creditors to express concerns, which the administrator would need to consider or, where the circumstances justify it, apply to the court to prevent the sale from taking place," said Davey.

However senior members of the profession said that the speed of the pre-pack process is vital to prevent the company losing value.

"The primary reason that a pre-pack is used in many cases is that the business is likely to decrease in value very quickly post-appointment, with little or no funds to trade or market the business for sale," said Ann Condick, director of insolvency at ICAS.

The proposals mean a business is unable to trade during this period and could risk losing staff and customers explains Steven Law, president of insolvency trade body R3.

"When faced with this option, directors may simply decide that liquidation is a better route, and this would reduce returns to both secured and unsecured creditors and result in considerably fewer jobs being saved than under a pre-pack."

"Sales to connected parties tend to happen because there is simply no other buyer at the table, "he said.

However, the British Property Federation (BPF) said three days to review connected party sales would be "insufficient" and have called for ministers to extend the period to one week.

"Today's announcement takes steps to improve the system for creditors, which is welcomed. However, more time should be given to creditors for them to analyse pre-pack deals to connected parties. The three-day period is not sufficient in our view, and should be extended to one week," said James Anderson, assistant director at the BPF.

According to insolvency statistics, about 40% of pre-pack administrations sell the business to connected parties.

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