Will new rules inspire confidence in pre pack administrations?

Steven Illes, one of our Insolvency Practitioners, thinks not.

In an article in The Times on Monday 1st March, the question was asked whether the Government’s announcement of plans to amend the rules regarding pre-pack administrations will inspire confidence. The article suggested that they were likely to be an improvement, but in quoting Colin Haig, president of R3 the Insolvency and Restructuring Trade Body, pointed out that “there’s still some way to go if these reforms are going to improve stakeholder confidence in pre pack administrations.”

In this article, we briefly look at what the new proposals are, why they have been proposed, and conclude with some comments from one of our Insolvency Practitioners, Steven Illes, who argues that the proposed reforms are not quite fit for purpose.

What are the pre-pack proposals?

The proposals were published on 25th February, and are timely, as it is anticipated that the number of pre-packs will increase once Covid-19 Government support for businesses winds down.

The legislation is the next stage in Government efforts to improve stakeholder confidence in pre-pack administrations where there are connected parties involved. In recent years, such sales have been seen by many as contentious, not least in 2020 where pre-packs involving Monsoon Accessorize, and Bensons for Beds, for example, resulted in creditors facing large losses.

Although pre-pack administration sales are widely considered to be a valuable rescue tool for insolvent companies, the concern has long been that such arrangements might not be in the best interests of creditors.

The new laws, if they are enacted into law, will require mandatory scrutiny of pre-pack administration sales by independent evaluators where connected parties – which would include the insolvent company’s existing directors or shareholders – are involved in the purchase of the company. This will include the requirement that the evaluators have indemnity insurance and should state in their reports that they have considered any previous report obtained, to prevent ‘opinion shopping’.

The government says that the new measures will improve confidence and transparency in pre-pack administration sales, giving the public and creditors reassurance that their interests are being protected alongside that of the distressed business. Others are not so sure.

 Steven Illes Comments

“The challenge that the insolvency profession faces is the public’s lack of confidence in the pre-pack administration process.  This lack of confidence is partly due to a lack of understanding of the insolvency framework that the profession works within and the steps that have historically been undertaken to deal with the pre-pack sale of a business.

Typically, an administrator would have marketed a business via a reputable agent for a period prior to the administration and the best offer often comes from the incumbent business owner(s)/funder.  The reasons for this are that the incumbent has a better understanding of the business and a greater idea on value than an unconnected party. It is worth noting that for smaller pre-pack administrations, the business owners can view the business as ‘their baby’ and will sometimes pay above a commercial level to try again. These dynamics will not change, whatever framework is put into place.

Unfortunately, the new proposals do not provide a sufficient framework which the profession feels is fit for purpose, or which will address the concerns of the public.”

The final word goes to Colin Haig, who explains that:

“……..in particular, there is no framework in place to ensure qualifying criteria for the evaluator position are being met. The new requirement for an evaluator to have professional indemnity insurance — which we proposed as a minimum requirement — will not be enough on its own to secure the confidence of the wider business community.”

Contact us for Pre-Pack Administration Advice

If your company is facing dissolution / collapse from debt, HMRC arrears, cashflow or other financial problems and you have exhausted all possible funding issues (perhaps because your key lenders are not willing to support you) then please do contact us for a fully confidential, and FREE, initial discussion at any of our offices:

At the meeting, our highly qualified specialists will provide you with independent, professional assistance/guidance and go over all the possible options, including pre-pack administration, and will identify those that will fit in with your company’s own requirements.