Costly new rules will put a drag on pre-packs
Plans to change the rules surrounding pre-packaged administrations by the government could drive up costs and undermine the process, IPs haved warned
Government proposals to reform pre-packaged administrations could sabotage
the procedure, according to insolvency professionals who warn it will drive up
costs.
Business minister Ian Lucas last month announced reforms to pre-packs aimed
at boosting confidence in the administration process, including proposals to
prevent an insolvency practitioner from advising on a pre-pack and then going on
to become the administrator.
Most insolvency practitioners recommend pre-packaged administrations because
they are quick and often offer creditors the best chance of recovering their
money. The proposals undermine both these aspects, insolvency practitioners
warn.
They fear the plans would incur higher costs and slow down the process. A
struggling company would have to pay two insolvency practitioners for the same
work, they claim.
A company in financial difficulty hires a insolvency practitioner to advise
on the best course of action. If a pre-pack is chosen, the IP will review the
business and seek the best sale price for the company.
The formal process for most pre-packs will often last a few hours when the
sale is conducted. Under the proposals, a second IP would be brought in at this
point. They will need to do another company review, slowing the process. They
may also handle the sale differently, causing further expense and delay.
“The proposed changes would add to costs, unquestionably,” said Ian McDonald,
head of restructuring at international law firm Mayer Brown. “In some cases that
may make a pre-pack unviable, particularly where there is a wider scepticism
about them in the first place.”
He said while there may be some benefits to the proposals, “the additional
cost will erode any additional benefit”.
Richard Heis, restructuring partner at KPMG, echoed the concerns and believes
the proposal could “significantly increase the cost of the administration”.
One insolvency partner said pre-packs would become “impractical” and is
unable to see “any benefits”.
Jonathan Porteous, an insolvency partner at Stevens & Bolton, claims the
changes could double the workload and fees and, in the end, the creditors may
not be better protected.
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An insolvency committee will spearhead the consultation which is due to end
later this year.
Further reading:
Pre-packs need reform, but
not too much