Changes To Pre-Packs Could Increase Transparency But May Lead To Increase In Liquidations

Expert Comments On New Proposed Notice Period

31.05.2011

Government proposals announced today introducing a three day notice period for pre-pack sales to connected parties could mean unsecured creditors lose out, as more businesses are liquidated instead of pre-packed.

While any attempt to bring greater transparency to the pre-pack process is to be welcomed, an unintended consequence of a delay could be the value of a business depreciating - jeopardising corporate rescues.

Andrew Walker, chair of R3 in Yorkshire and partner at Irwin Mitchell, comments: “Any measure that boosts confidence in the pre-pack procedure is to be broadly welcomed. However it is important to note that a pre-pack is chosen due to the speed of the procedure which helps preserve the value of the business. Three days is a long time in business, and if unable to trade in that period, the business is at risk of losing key staff and customers. When faced with this option, directors may simply decide that liquidation is a better route, and this would reduce returns to both secured and unsecured creditors and result in considerably fewer jobs being saved than under a pre-pack.”

This announcement coincides with the annual Government report on insolvency practitioner compliance with (SIP 16) reporting on pre-packs. In 2010 only 1.7 per cent of cases were referred to the Recognised Professional Body for disciplinary procedures and general compliance increase to 75 per cent.

The Government’s monitoring report on pre-pack compliance also indicates that there is “no reliable evidence to suggest that misconduct by directors is any more prevalent in pre-pack cases than in conventional administrations”. Sales to connected parties tend to happen because there is simply no other buyer at the table and also occur in 40 per cent of business sales.

Andrew Walker continued: “It would be better for the business rescue culture if the Government looked at ensuring suppliers are bound in the event of a formal insolvency or were prevented from making ransom payments. We have put these ideas to Government as part of our ‘Holding rescue to ransom’ campaign. If today’s proposals are to be taken forward we advocate that our ideas are also brought into statute to help businesses stay held together during the three day period.”

Insolvency practitioners estimate the change in legislation R3 is calling for will reduce the number of pre-packs by more than a fifth.