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17/10/2018

The value of pre-pack administrations: R3’s views on the 2015 reforms

‘Pre-pack’ administrations – where the sale of a company’s business or assets is agreed before it enters an insolvency procedure, and completed shortly afterwards – are one of the most discussed parts of the UK’s insolvency framework. In this post, we’ll look at how this important part of the UK business rescue landscape has changed recently – and how it might change in future.

Pre-packs can be a valuable business and job rescue tool. They help to preserve the value of a company by limiting publicity about its financial difficulties until action has been taken to resolve them. This makes it easier for viable businesses to continue to trade (and employ staff) after they run into financial problems, and means more money can be paid back to creditors. Indeed, a pre-pack should only happen when it is the best deal available for creditors. Despite the attention they attract, pre-packs only represent around 2% of annual corporate insolvencies.

In 2015, the insolvency and restructuring profession and other stakeholders introduced a number of reforms to tackle concerns around the lack of transparency in ‘connected party’ pre-packs (where those involved in purchasing a business or assets through a pre-pack have a connection to the insolvent company). At the same time that the profession made its changes, the Government gave itself the power to regulate or ban sales to connected parties from administrations (including pre-packs) should the reforms not be seen to have improved trust and transparency in the insolvency and restructuring framework. This power expires in 2020 (and is included in the 2015 Small Business, Enterprise and Employment Act).

The pre-pack reforms included: measures to improve marketing of pre-packs; a requirement that valuations of businesses and assets be carried out by a valuer with professional indemnity insurance; the insolvency profession’s pre-pack reports (known as ‘SIP16’ reports) to be monitored by the Recognised Professional Bodies, rather than the Insolvency Service; connected parties being given the option of preparing a ‘viability review’ of a post-pre-pack company; and the establishment of a Pre-pack Pool (of independent business experts) to review and give an opinion on proposed pre-packs submitted by connected party purchasers.

The Government is currently reviewing the impact of the reforms on connected party pre-packs so that it can assess whether to enforce its 2015 legislative power.

R3 supported the implementation of the recommendations and is in favour of the efforts to further develop the reforms. So far, the impact of the reforms has been mixed, with some changes being seen as more effective than others. Use of the Pre-pack Pool, a voluntary process, by connected party purchasers has been disappointingly low, but R3 does believe that the Pool could be a valuable tool if changes are made to it. The marketing and valuation changes to SIP16 have, however, been seen as effective by R3 members.

R3 has discussed its views and recommendations with the Government, and submitted a written response. Key points include:

  • The Government should not ban or over-regulate connected party sales from administrations.
     
  • Pre-packs and connected party sales are already regulated. There is a well-established regulatory framework overseeing the work of insolvency practitioners who provide the assurance that connected party sales lead to the best return for creditors.
     
  • The voluntary nature of the Pre-pack Pool is holding back its effectiveness. R3 recommends making it mandatory for a connected party purchaser to make a referral to the Pool.
     
  • The Government should support and help develop the reforms made in 2015 and should look at the impact of the reforms as a whole, not just the Pre-pack Pool.
     
  • The Government should look at the pre-pack reforms in a wider context: introducing its Corporate Insolvency Framework proposals (published in 2016 and revised in August 2018) would provide new business rescue tools which would reduce the need for pre-packs.

The Government is expected to publish its response to the review later this autumn.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.