New ‘Backstop’ Laws To Be Introduced

New rules to enable the Government to take strong action against the use of so-called pre-pack insolvency deals are set to be introduced, according to reports in The Times newspaper.

The legislation is being introduced as part of the Small Business, Enterprise and Employment Bill and will enable the Government to ban pre-packs if new voluntary measures are deemed not to have been effective.

Pre-pack deals allow bosses of failing companies to drop their debts and carry on trading under a different name.

Despite their ability to save jobs, their use has always been controversial with arrangements often criticised by unsecured creditors. Some pre-packs are also perceived to lack transparency and punish healthy companies already operating in the sector.

Once the law is passed, the Government will have the option to use the new legislation - however it wants to see how effective a new voluntary code will be first.

These industry-wide measures follow a government-commissioned review led by Teresa Graham.

In the report, which is backed by R3, she recommends the creation of an independent panel to scrutinise pre-pack deals and a directors’ report explaining how the newly named organisation would be viable.

A government spokesman said: "The review into pre-pack administration by Teresa Graham recommended a package of voluntary measures. We expect the voluntary measures to work but will take a power to legislate, to ensure government can act quickly if needed.

"Government plans to evaluate after three years and would consult before legislating. Implementation of the voluntary reforms will be one indicator of success."

Andrew Walker, Partner and Head of Restructuring and Insolvency said:

Expert Opinion

A pre-pack is often the only way to realise the assets of an insolvent company in any meaningful way, which often results in the saving of jobs and the viable parts of a business and is therefore a useful tool in the armoury of an Insolvency Practitioner.

“We however welcome anything that prevents the abuse of pre-packs and that re-assures the creditors and the public at large that they are being used appropriately as part of the rescue culture to save jobs and maximise the return to creditors.”
Andrew Walker - Partner