Pre-packs – under review

Pre-packs – under review

An independent review into pre-pack administration has been announced by the government. The review, to take place in late Spring 2013, is to consider how the pre-pack administration regime is working in practice and whether further changes are required. We spoke to Frances Coulson of Moon Beever and Chris Laughton of Mercer & Hole consider the issues.

What has led to the government review?

Frances Coulson (FC): The last review into pre-packs prompted a suggestion by the then minister Edward Davey that three days’ notice should be given for a pre-pack sale to connected parties. The review concluded with no action, the Minister apparently accepting that implementing such a proposal would detrimentally affect business rescue. However, it would appear that following continuing complaints by some creditors, pressure has built up so that a further look is being taken.

Chris Laughton (CL): The BIS Select Committee report on the Insolvency Service had as one of its conclusions: ‘We therefore recommend that together, the department and the Insolvency Service commission research to renew the evidential basis for pre-pack administrations.’

There are strongly held views by some constituencies, including various unsecured creditor representatives, that pre-packs do not operate in creditors’ interests but rather go directly to benefit the interests of directors, owners and secured lenders. Many insolvency professionals hold equally strong views to the effect that pre-packs are a valuable tool to yield the best returns for creditors generally in some circumstances.

What are the current problems with pre-packs?

FC: The main problem is with perception and a lack of understanding on the part of creditors. One can understand why creditors feel aggrieved to see directors appear to dump debt and buy back the business and continue as before, but in reality the administrator has to be convinced the deal is best for the creditors and so the sale to the directors may give the best return on the sale.

The Insolvency Service reviews SIP16 reports by which the administrator gives a ‘post

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