New laws which require stricter scrutiny of pre-pack administrations have been welcomed by the North West branch of R3, the trade body for the insolvency and restructuring profession.
New laws announced by the government today will require independent scrutiny of pre-pack administrations where connected parties, such as the company’s existing directors or shareholders, are involved in buying the business or its assets.
A pre-pack is where a sale of part or the whole of a company’s business or assets is arranged in advance and completed just after it goes into administration. Pre-packs are widely considered to be a valuable business rescue tool though concerns have been raised that they may not always be in the best interests of creditors.
Allan Cadman, North West chair of R3 and a partner at Poppleton & Appleby, said: “We broadly welcome the Government’s announcement, in particular the decision not to ban sales to connected parties in pre-packs.
“Pre-packs are an important rescue tool as they are often the best way of preserving a business and maximising returns to creditors. A rapid sale may be essential as it is sometimes difficult for a business to continue trading once it becomes known that it is in financial distress. The speed of the transaction helps preserve the value of the business while saving jobs. In many cases the previous management team will be the ones with the necessary knowledge to make a success of the acquired business.
“The insolvency and restructuring profession is very sensitive to the impact of pre-packs on creditors, and there is a careful balance to strike in these situations between transparency, protecting creditor value, and business rescue. These reforms, while not perfect, should help to improve confidence in this important business rescue tool.”
