The government has today announced that it will not be changing the legislation on pre-packs in administrations after all. Pre-packs, or pre-packaged business sales, have always been controversial. In essence, they involve placing a company into administration and the business being immediately sold, often to the current management.
The common allegation is that the sale does not necessarily achieve as great a realisation as could have been achieved had the business been openly marketed, resulting in detriment to creditors, and that that the process simply allows the management to “dump debt”. Naturally enough, politicians and the media have been quick to jump on the bandwagon, demanding changes to the legislation to make pre-packs more difficult.
Whilst it is no doubt possible to point to examples of pre-packs being used inappropriately, there is little evidence of widespread abuse, or that unsecured creditors have suffered losses that otherwise could have been avoided. On the contrary pre-packs can often maximise realisations. Used properly and in the right situation, pre-packs can secure businesses and preserve jobs.
Nevertheless, the government had been promising a raft of changes to the relevant legislation, the most significant being to impose a requirement that creditors should be given three days’ notice of any intention to sell the business to connected parties. That period was intended to give creditors an opportunity to object to the sale and mount their own offer. The unintended consequences would probably have been to reduce the business value, particularly in cases where there is no funding to continue trading or engage in extensive marketing. Staff and customers would probably walk, leaving nothing to sell. We therefore welcome the government’s u-turn.
However, there is now an onus on us all in the insolvency profession to work hard to restore creditor confidence, and to ensure that pre-packs are used properly. They should not be used without examining all alternative options; we are, after all, supposed to be acting to protect creditors’ interests.
If you’re facing tough times, and would like to talk through the available options, including the possibility of a pre-pack, please get in touch with me or a member of my Team. As always, the earlier we talk the greater the chance of finding the best outcome for all the parties involved. An initial conversation will always be without any obligation.