Out-Law News 2 min. read

Voluntary scrutiny of 'pre-pack' sales of insolvent businesses to connected persons proposed

More must be done to ensure that pre-arranged sales of insolvent businesses to "connected parties", such as former directors, are fair to customers and creditors, the UK government has said.

It plans to introduce a number of voluntary measures, with the potential for legislation at a later date if these are unsuccessful, to increase the transparency of these 'pre-pack' sales and improve financial returns. The proposals, which include the introduction of a 'pre-pack pool' where deals can be scrutinised by an independent person before going ahead, were recommended by businesswoman Teresa Graham in her government-commissioned review of the practice.

"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," said Jenny Willott, the business minister. "But it is also important for those who are owed money to know they are getting the best possible deal in the circumstances."

"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," she said.

The government also intends to strengthen oversight of the insolvency profession, including by granting new powers to the Insolvency Service as oversight regulator, Willott said. However, "further discussions" are needed before it can take forward proposals to limit the ability of insolvency practitioners (IPs) to charge by the hour, as proposed in the same consultation exercise, she said.

In a pre-pack sale, the business is marketed to a new buyer before the proposed insolvency procedure begins and sold immediately afterwards so that its value can be preserved by limiting the length of its association with a formal insolvency process. Although the practice can be used to preserve ultimately viable businesses and save jobs it has attracted criticism, particularly from the property sector, as unsecured creditors such as landlords do not need to be given advance notice of a pre-packaged sale.

In her review of the practice, which was commissioned last year by business secretary Vince Cable, Graham found that creditor pay-outs were often worse and the new business less likely to succeed when it was sold to a 'connected party'; typically the former directors or owners of the failed business. According to government figures, around 60-70% of pre-pack sales are to parties connected to the insolvent company. Although she recognised the "unique place" held by pre-packs as a means of rescuing businesses from insolvency, Graham made a number of recommendations to improve the practice, particularly where the sale is made to a connected party.

The government has accepted Graham's recommendation to create a 'pre-pack pool' into which details of proposed sales to connected parties could be submitted for scrutiny by an independent third party before going ahead. If the deal is not submitted to the pool, or the third party does not support it, this should be disclosed to creditors. Connected parties would also be requested to complete a voluntary 'viability review' for the new company, setting out its chances of success.

Other recommendations applicable to pre-packs more generally include a new requirement that the valuation of the insolvent company be carried out by a valuer who holds professional indemnity insurance, to increase confidence that the sale is going forward at a fare price. In addition, the proposed sale of the business should be marketed properly in order to maximise sale proceeds, Graham said.

The government has also published its response to its consultation on IP regulation and fees, containing proposals to be taken forward "as soon as parliamentary time allows". These include new regulatory objectives for the various professional bodies involved in overseeing IPs, backed with a reserve power that would allow the government to replace these with a sole regulatory body if necessary. The Insolvency Service, as oversight regulator, would be given new powers to sanction a regulator and to petition the court to sanction an individual IP where this was in the public interest.

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