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Review of pre-packs needed to allay concerns

PRE-PACK ADMINISTRATIONS have for some time been a bone of contention for creditors and government, mainly because creditors feel they are left out of the loop and only hear of the sale of a business after it has happened. But, in a bid to allay concerns the government has commissioned another review into the insolvency process.

In a pre-pack a business is marketed and a buyer lined-up prior to the start of the process, with the company sold immediately on appointment of administrators.

Back in 2010 the government reviewed pre-packs and in 2011, a range of proposed changes, including the implementation of a three-day notice period in which to inform creditors of a sale, were halted following concerns they did not allow creditors enough time to raise any concerns. A Business Innovation and Skills (BIS) Select Committee has also called for tougher sanctions where there is evidence of abuse of the system by insolvency practitioners.

Review process needed as soon as possible

It’s high time that pre-packs were looked at again as part of a detailed review of the insolvency process. Although the Insolvency Service has highlighted that the outcome of the review will lead to greater transparency and compliance, it is difficult to speculate what actual measures may be suggested.

The framework of suggestions made back in 2011 was insufficient and poorly drafted. For example, three days’ notice doesn’t allow creditors sufficient time to raise detailed and constructive concerns but could be enough to scupper plans to sell the business as a going concern and destroy value. However, the proliferation and variety of high profile pre-packs that have made headlines recently is helping to raise awareness of their role.

If the proposals can go some way to create greater transparency and understanding of the process, that must be a good thing. There is little doubt that in some cases a pre-pack does produce the best outcome for creditors, if they can be satisfied of that then the use of pre-packs should be de-stigmatised.

The quick turnaround required by the pre-pack process typically favours two types of prospective buyer, each with a distinct approach to managing a sale.

The speed with which a sale needs to be processed limits the number of parties that can realistically make an offer. Often, this means that the senior management or specialist distressed investors end up completing the purchase.

The planned review could be extremely helpful in creating a system that sets out accountable parameters for informing creditors, retaining staff and demonstrating that all realistic routes (before deciding on a pre-pack sale) have been explored. It could also help to attract interest from entrepreneurial buyers who might be prepared to take the business forward in a new direction.

What is imperative though is that any eventual framework is based on genuine and thorough consultation with insolvency practitioners, lawyers, accountants and the appropriate representative bodies.

Andrew Taylor, partner and head of corporate recovery at Shakespeares

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