Pre-pack reforms an ‘important development’, says R3
Commenting on reforms to ‘pre-pack administrations’ announced today (which include the introduction of a pool of business experts to review ‘connected party’ pre-packs, and new rules on valuing and marketing struggling businesses), Phillip Sykes, president of insolvency trade body R3, says:
“This package of reforms is an important development for the UK’s business rescue landscape.”
“The Teresa Graham report argued that pre-packs have a role to play in business and job rescue, and it is important that steps are taken to improve trust and transparency in how they work.”
“There are relatively few pre-packs every year, but they have a disproportionately big impact on the perception of the insolvency regime.”
“Taken together, the reforms will help to ensure pre-packs can continue to make an important contribution to the UK’s insolvency regime, which is ranked as one of the world’s best by the World Bank.”
“The insolvency profession particularly welcomes the updated requirements on the marketing and valuation of insolvent businesses, which will help those involved in a ‘pre-pack’ tread the difficult line between transparency for creditors and the discretion needed to secure business and job rescue.”
“The Pre-pack Pool will add to the assurance in the process already provided by an insolvency practitioner. The insolvency practitioner is there to get the best deal for creditors. A pre-pack should only happen if the insolvency practitioner can show it represents the best deal for creditors.”
What is a pre-pack?
A ‘pre-pack’ is where the sale of a company’s business and operations is arranged prior to the company entering administration, with the sale completed shortly afterwards. The purchaser of the business may have a previous connection with the business – this is known as a ‘connected party pre-pack’. The Pre-pack Pool is designed to be used by purchasers involved in this type of pre-pack.
The changes to the marketing of businesses potentially subject to a pre-pack apply to all pre-packs and have been introduced through an updated ‘SIP16’, part of the formal practice guidance for the insolvency profession.
What is changing?
Under the new rules, ‘connected parties’ wishing to purchase a business through a pre-pack administration have the opportunity to send details of the proposed purchase to a pool of independent business experts. One of these experts will review the details of the proposed pre-pack and provide an opinion as to whether:
- It would not be unreasonable for the pre-pack to proceed
- The case for the pre-pack is not unreasonable but there is some missing evidence
- The case has not been made for the pre-pack
The opinion from the pool will then be attached to the report provided by the insolvency practitioner to the insolvent company’s creditors. It is up to the ‘connected party’ to make the application to the pool.
To improve the marketing and valuation of potential pre-packs, and therefore improve the chances of a higher return for creditors, there are new practice requirements for insolvency practitioners that set out how they and company directors should market businesses to potential buyers.