Some pre-pack administrations have understandably received a bad press. Especially where they involve people connected to the insolvent company, writes Karen Bright, Head of our Litigation & Dispute Resolution teams.
So, earlier this month the government announced it will introduce a Bill so that pre-pack sales – where connected parties, such as the insolvent company’s shareholders or directors, are involved in the process – will be required by law to undergo independent scrutiny.
As the Law Society Gazette reported: “Pre-pack sales, where the deal is agreed before a business enters administration, have become a recurring feature in the legal sector, with insolvency practitioners preferring to find an immediate buyer rather than risk regulatory intervention in the struggling business and creditors being left with nothing. On a number of occasions in the sector, the pre-pack has been led by people heavily involved with the bought-out firm, and critics say this is a method of simply wiping out debts to creditors and continuing to operate as before but under a different guise.”
Essentially what the government hopes to achieve is a crackdown on insiders clearing themselves of all liabilities, and about time.
“Pre-pack sales play an important role in rescuing viable businesses, while protecting jobs and supporting our economy,” said Lord Callanan, the Minister for Corporate Responsibility.
“As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process,” he continued.
“This new law will ensure all sales to connected parties are properly scrutinized – protecting the interests of creditors and the general public, as well as the distressed company,” Lord Callanan said.
It’s no coincidence that the government has decided to intervene now that a tsunami of insolvencies are expected, once support for businesses reduces and the furlough scheme in particular, comes to a close at the end of October.
The government has not yet announced how mandatory scrutiny of pre-pack transactions will be enforced. However, whatever emerges should provide much-needed transparency and reassurance that a pre-pack administration can been completed in a fairly.
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The above is accurate as at 19 October 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.