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Pre-pack reform on the way

The government has announced planned changes to the UK’s insolvency regime that will affect how firms that have failed are sold through what is known as a ‘pre-pack’ sale. This process is an insolvency procedure where a company arranges to sell its assets to a buyer before appointing administrators to facilitate the sale.

If the proposals are transposed into law, pre-pack sales to connected parties – that is, directors or shareholders that were involved with the management or ownership of the failed business – will be subject to mandatory scrutiny.

As the Insolvency Services points out, “Pre-pack administration sales are widely considered to be a valuable rescue tool. However, concerns have been raised that arrangements may not always be in the best interests of creditors.”

The reality for many is that while they’re considered to be a powerful and legal way of selling the business on to a trade buyer or third party, a pre-pack does leave many who lose out with a nasty taste in the mouth since the transaction is not completed on the open market.

According to Paul Taylor, a partner at City law firm Fox Williams, “Every five years or so, the insolvency profession seems to try and wrestle with the public outcry about the use of so-called pre-packs.” As he points out, “In its simplest terms, this is where Widget Manufacturing Limited goes into administration, and the very next day Widget Manufacturing 2020 Limited is operating the same business and being owned by the same shareholders … the only crucial difference is that several key liabilities – usually owed to landlords – are left behind in the insolvent business.”

The problems associated with pre-packs aren’t new and attempts to further regulate this area of insolvency practice led to reforms in 2008 and 2013 and the Introduction of Statement of Insolvency Practice 16, known as SIP 16. But the process, which mainly relied on the insolvency industry regulating itself by a mixture of greater transparency and emphasis on valuation of transferring assets, hasn’t proved to be the boon that it was meant to. As Taylor explains, feedback remains that “SIP16 is not fit for purpose and given the increased level of business failures, with plenty more Covid insolvencies waiting in the wings, it is no surprise that government has indicated a willingness to look at this again.”

Any new legislation in this area will apply to England, Scotland and Wales; insolvency matters are a devolved matter in Northern Ireland.

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