Pre-Packs Still Under the Spotlight

Following the recommendations of regulatory expert, Theresa Graham in the summer of 2014, the insolvency profession and creditor organisations are working together to develop a process to independently review insolvency pre-pack administration sales of businesses to connected parties, such as the former management or directors.

A steering group has been establishing a pool of experienced business people to carry out these reviews and whilst it was originally envisaged that the pool would begin reviewing cases during the summer of 2015, this is now likely to begin towards the autumn of that year. It is also envisaged that an updated version of Statement of Insolvency Practice (SIP) 16 will be introduced at the same time. SIP 16 is the statement that defines the minimum levels of disclosure required to be made to creditors, following completion of a pre-pack sale of a business.

The administration pre-pack sale process has been heavily criticised for its lack of transparency in the past and it is anticipated that the reviews to be carried out by the pre-pack pool will go some way towards reducing the level of such criticism.

As at June 2015, 21 members had signed up to the pool, which is scheduled to be launched on 1 September 2015 including two retired insolvency practitioners. Cases are likely to be reviewed from October 2015 onwards.

Pre-pack sales take place under extremely sensitive circumstances where often speed of the process is vital. The pool has given assurances that its reviews will be carried out within forty-eight hours, which the steering group does not feel should create a “deal stopper” situation.

Theresa Graham’s other recommendations included new guidelines on the marketing of a business prior to a pre-pack deal being entered into and a viability review of the purchasing company to ensure that it is capable of survival for a minimum of twelve months.

These initiatives are wholly voluntary and have no statutory enforcement backing. However the Small Business Enterprise and Employment Act 2015 does provide for the government to legislate with a view to potentially prohibiting pre-pack sales to connected parties in the event that the measures are not followed by the profession.

Government therefore has a very big stick that could be used if necessary. There is however a so-called “sunset clause” attached to the legislation in that the power for government to legislate on the matter expires if it is not used within five years.

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