A REVIEW into the use of heavily-criticised pre-pack administrations has rejected the idea of legislative scrutiny, in favour of a series of voluntary measures that will make the process more transparent, fair and give creditors a better deal.
Teresa Graham, the ICAEW member who led the government-commissioned review, said that pre-packs should have a place in the UK's insolvency landscape, but called for "major improvements" in how they are administered.
A pre-pack administration is where the sale of the business is marketed prior to the company entering administration and subsequently sold on appointment of administrators. However, the administrators must submit a SIP16 report outlining why the pre-pack was chosen as the best course of action for creditors
Around 600 of the 2,365 UK companies that went into administration last year were subject to pre-packs, an insolvency process that has been much maligned because creditors are usually left out of the loop until the sale has taken place. In some instances a supplier that is owed money does not realise a pre-pack has taken place until they contact a company to chase payment. As with all administrations, the debt held by a company is usually reduced when it enters an insolvency process.
Graham's recommendations include creating a ‘pre-pack pool' where deals will be scrutinised prior to a sale taking place, though the system would only examine deals where there is a "connected party" involved, such as a director of the failed business.
Under the proposals, members of the pool are expected to spend no longer than half a day reviewing a pre-pack proposal to avoid delays. Phillip Sykes, head of restructuring and insolvency at Moore Stephens, said it may be hard to keep to that schedule.
"There is a real risk that the amount of information included in the reports for the pool becomes unmanageable, as existing business owners try to protect themselves from any potential litigation by disclosing as much as possible in their pre-pack proposal," Sykes said.
Any connected party will also be required to complete a ‘viability review' for the new company, while valuations must carried out by a valuer who holds professional indemnity insurance, to increase confidence that the sale is for a fair price. Additionally, proper marketing must be undertaken to maximise sale proceeds.
"I believe my proposals, implemented as a complete package, will lead to real improvements in pre-packs," Graham said. "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."
Innovative and measured proposals
Giles Frampton, president of insolvency trade body R3, said the report is "an excellent contribution to the pre-pack debate".
"The report's recommendations are innovative, measured, and worth exploring. It is also encouraging to see the report's recommendations focus on more than just the insolvency practitioner's role in a pre-pack. Instead - and rightly - the report turns the spotlight on directors involved in a connected party pre-pack."
Legislation could follow unless changes are made to the existing system.
"Should these measures fail to have the desired impact and they are not adopted as I would hope by the market, then government should consider legislating," Teresa Graham said.
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