Business Minister announces plans to clean up ‘pre-pack’ insolvency deals

New recommendations which will make sure businesses and customers get a better deal from failing companies have been announced by Business Minister Jenny Willott.

When companies are on the brink, arrangements are often made to sell the profitable parts before insolvency is announced to obtain the best price possible. These are known as pre-pack sales.

The proposals follow an independent review by Teresa Graham CBE, an expert in better regulation, launched in July last year. The review identified concerns that these particular types of sales were not always transparent or fair and were not delivering the best outcomes for customers and small businesses affected when companies went bust.

The review also identified the need to improve public confidence in this aspect of the insolvency system and found that, while pre-pack sales are an important tool for rescuing struggling businesses, important changes are needed to increase the transparency of pre-pack deals, boost the survival rates of the new business and improve financial returns.

Business Minister Jenny Willott said: “When these types of business sales are carried out properly, they allow the viable parts of the business to continue operating and jobs are saved. But it is also important for those who are owed money to know they are getting the best possible deal in the circumstances. Transparency is vital. Teresa Graham has come up with a set of recommendations which will ensure people get back as much money as possible and make pre-pack deals more transparent. We will be working with business and industry to implement these recommendations in full and we believe it will help restore trust and confidence in pre-pack deals. We will monitor progress closely and will take the power to legislate if necessary.”

Teresa Graham’s recommendations look to improve the results for creditors without imposing undue costs. They are particularly targeted at sales to ‘connected parties’ – typically the former directors or owners of the business – as evidence showed that creditor pay-outs were often worse and the new business was less likely to succeed following these kind of pre-pack deals.

Recommendations include:-

• Creating a ‘pre-pack pool’ where details of a proposed sale to a connected party can be shown to an independent person prior to the sale taking place. This will increase transparency and give greater confidence to creditors that the deal has undergone independent scrutiny.
• Requesting connected parties to complete a ‘viability review’ for the new company to improve its chances of success.
• Requiring valuations to be carried out by a valuer who holds professional indemnity insurance, to increase confidence that the sale is for a fair price
• Ensuring proper marketing is undertaken in order to maximise sale proceeds.

Teresa Graham CBE said: “My review of pre-pack administrations over the last nine months shows that they have a unique place in the insolvency market. However there must be major changes in the way they are administered. I believe my proposals, implemented as a complete package, will lead to real improvements in pre-packs. I hope the insolvency industry, as well as all those in business, will embrace these measures as it is in everyone’s interest that they are successful. I believe they will lead to real improvements in transparency and scrutiny.

Insolvency trade body R3 President, Giles Frampton: “Teresa Graham’s report is an excellent contribution to the pre-pack debate. We fully support her conclusion that there is a place for pre-packs in the UK’s insolvency framework. The report’s recommendations are innovative, measured, and worth exploring. It is also encouraging to see the report’s recommendations focus on more than just the insolvency practitioner’s role in a pre-pack. Instead – and rightly – the report turns the spotlight on directors involved in a connected party pre-pack.”

The Institute of Chartered Accountants in England and Wales Executive Director, Professional Standards, Vernon Soare, said: “Teresa Graham’s recommendations tackle the myths about pre-packs. We are pleased the review shows that when pre-packs are done properly, they can bring big benefits to the UK economy because they save jobs and costs. However, we understand that those involved in insolvency proceedings need to trust the pre-pack process, which is why we support the review’s recommendations to improve its transparency.

“We specifically support the recommendations that directors should take more responsibility for the on-going viability of Newco and that there should be independent scrutiny of a deal before the event. We will be very happy to share our expertise to establish the proposed pre-pack panel. As the largest regulator of insolvency practitioners, we are happy to engage with the Government to make these proposals work in order to maintain the pre-pack as a legitimate tool of the UK’s rescue culture.

Matthew Fell, Director of Competitive Markets at the Confederation of British Industry, said: “It is encouraging to see that good progress is being made towards preventing abuse of the pre-packs regime and restoring trust in this key part of the insolvency regime. The proposals balance the interests of creditors with the need to support jobs and growth, by allowing viable activity to continue.”

Jenny Willott also announced proposals to strengthen the regulation of the insolvency profession. The proposals include new regulatory objectives and stronger powers for the Insolvency Service as oversight regulator. Jenny Willott said: “We recently consulted on changes to strengthen the regulatory regime for the insolvency profession to improve public confidence in the system. For the first time, regulators will have a clear statutory framework they must follow backed by sanctions for noncompliance. I am pleased to see that there was widespread support for these changes.”