In the last week the final stage of the government’s pre-pack administration reforms has been announced, which includes the introduction of a pool of business experts to review pre-packs when connected parties are involved.
Although there are relatively few pre-packs every year, the reputation they have in the wider industry has a disproportionate impact on the way the insolvency industry is perceived. This is despite the fact that the UK’s insolvency regime is ranked as one of the world’s best by the World Bank.
Balancing creditor returns and rescuing jobs
Pre-pack administrations are designed to keep businesses trading and save jobs. Despite the perception that pre-packs can be a way for directors to shirk their responsibilities to creditors, in many cases they actually provide a better return for creditors than a creditors’ voluntary liquidation.
One of the main changes to the pre-pack process is the updated requirements for the marketing and valuation of an insolvent business, and this has been supplemented with the introduction of the ‘pre-pack pool’. It is hoped the result will be improved transparency for creditors and an increase on the return they can typically receive from pre-packs in the future.
What is a pre-pack pool?
A pre-pack administration is the process by which the sale of a failing company’s business and operations are arranged before the company enters administration. In some cases, those buying the business’s assets and goodwill have a previous connection with the business, known as a ‘connected party pre-pack’, and this is where problems can arise.
In some cases, creditors argue that businesses sold in connected party pre-pack deals are not marketed correctly, are undervalued, and in many cases are completely unreasonable. The pre-pack pool is designed to counter this perceived bias by appointing a team of independent experts who will review connected pre-packs to make sure they are suitable.
How will the pre-pack pool work?
After months of speculation, the Department of Business, Innovation and Skills has announced the names of 20 individuals who will be responsible for reviewing applications for pre-pack sales of insolvent business and providing recommendations.
Any connected party who wishes to buy a business out of administration will have to submit their application to the pre-pack pool. The 20 independent individuals will then be able to choose one of three responses to the application:
- The pre-pack is not unreasonable;
- The pre-pack is not unreasonable but there are minor limitations in the information provided;
- The case for the pre-pack has not been made.
Applications to the pre-pack pool will be voluntary and can be made via a secure, online portal. Applications will cost £800 +VAT and the opinion of the pre-pack pool will be made known to creditors after the sale has been completed.
Improvements to the way pre-pack administrations are marketed and valued
In addition to the introduction of the pre-pack pool, there have also been changes to the way pre-packs are marketed and valued, with the aim of securing a higher return for creditors. The new requirements mean insolvency practitioners will have to set out how they and company directors intend to market struggling businesses to potential buyers.
Welcoming the changes, Phillip Sykes, the president of the insolvency trade body R3, said: “The insolvency profession particularly welcomes the updated requirements on the marketing and valuation of insolvent business, which will help those involved in a pre-pack tread the difficult line between transparency for creditors and the discretion needed to secure job rescue.
“The pre-pack pool will also add to the assurance in the process already provided by an insolvency practitioner. A pre-pack should only happen if the insolvency practitioner can show it represents the best deal for creditors.”
If you are considering administration, per-pack, or simply unsure what to do with your insolvent company call 08000 746 757. Remember we rescue businesses and protect directors from insolvent positions.