Pre-pack administrations, a company debt solution which are commonly utilised by directors to tackle their businesses insolvency issues, could be banned under new regulations seeking to address the underlying deficiencies within the procedure.
A government-commissioned report release in July called for regulations corresponding to the divisive measure to be tightened up and made more accountable. through the introduction of more stringent scrutiny on how they are used.
A pre-pack administration involves a prospective purchaser – in certain cases the existing director – lining up the company prior to the official appointment of administrators and creditors being made aware. The company is then sent immediately into administration and the prospective buyer secures a quick acquisition, without inheriting any of the existing debts.
Prominent organisations such as Blacks, Internacionale and the Laurel Group have all used the procedure in the past in order to continue trading whilst simultaneously passing into administration, though they have often generated controversy because they can provide directors the logistics to clear their debts whilst unfairly enabling them to leave their creditor’s short-changed – despite the fact that their company is able to still trade.
However, new ‘backstop’ legislation is now set to be instigated which will seek to protect the interests of unsecured creditors in the UK through the introduction of new government powers to reject the sale of an insolvency business back to its current owners in the event that it undergoes a pre-pack administration.
The move is set to address underlying issues with the procedure identified in a government review of the measure, which concluded that whilst the procedure has ensured that a multitude of employees across the UK have managed to retain their jobs when their company begins to start struggling financially, and insolvency costs have been lowered substantially through its provision, that nevertheless it has unfairly allowed many directors to pass off their debts and leave their creditors unpaid.
Other issues within the process highlighted in the review report were that it isn’t sufficiently regulated and its usage puts financially stable and well-managed companies at an unfair disadvantage to its struggling competitors.
However, the effectiveness of new voluntary regulations, like the introduction of an external panel to evaluate pre-pack administration deals, will be thoroughly tested before any final decision is made about the shape of the reforms.
Senior accountant Theresa Graham, who led the review, called for directors to detail how they would successfully run a company that has been rescued via a pre-pack deal, while she said there should be better marketing of the deals to find the best buyer for the job.
The review of the insolvency measure was headed by industry-expert and senior accountant Theresa Graham, who has urged policymakers to introduce new protocol which necessitates that connected directors clearly elaborate on how they believe they will turn their businesses fortunes around when using pre-pack administration to rescue their companies.
Andrew Tate, the deputy vice-president of insolvency trade body R3, argued that the danger of authorising a total ban on pre-pack administrations for related parties was “an unreasonably blunt tool”.
Mr Tate identified that whilst he supported the measures suggested in the review report, he nevertheless believed a total removal of pre-pack administrations for related parties would be a step too far.
Mr Tate said: “The Graham review suggested regulating connected party pre-packs as a last resort; it did not recommend an outright ban.
“Whereas the Graham review, the insolvency profession and creditors recognise that pre-packs have their pros and cons, the proposal is an unreasonably blunt tool.”
A Government spokesman said: “The review into pre-pack administration by Teresa Graham recommended a package of voluntary measures. We expect the voluntary measures to work but will take a power to legislate, to ensure Government can act quickly if needed.
“Government plans to evaluate after three years and would consult before legislating. Implementation of the voluntary reforms will be one indicator of success.