Pre-pack administrations have always been controversial and are subject to heated criticism from creditors who have been left out of pocket after a deal has completed.
In a pre-pack administration deal the administrator packages up the valuable business assets and completes the sale. The creditors are not involved and their approval is not necessary. Company directors and management can use this process to jumpstart their old failing business and remain at the helm.
The abuse of the pre-pack administration process has been much documented in the press. One high profile example being the sale of Cobra Beer’s assets to Coors immediately after Cobra Beer entered administration. The deal saved the brand, the jobs, but also left suppliers £75 million in debt.
Ed Davey’s new proposed changes to slow down the process, making it more difficult for failed business owners to regain control, would give creditors more power over the administration.
The proposed changes, aired in early April, would involve implementing a three-day notice period for connected parties, such as creditors, to oppose a deal before the pre-pack is finalised.
The notice period would give creditors time to “express concerns, which the administrator would need to consider, or make a higher offer for the assets,” said Mr Davey.
The proposal could become law by the end of the year, and would apply to any sales back to connected parties in an administration process where the assets were not publicly marketed.
The administrators would have to provide an explanation of why the pre-pack administration was implemented in the records at Companies House. They would also have to say that, in their opinion, the price is the best value for the creditors.
Vernon Soare, executive director of the institute of Chartered Accountants in England and Wales (ICAEW), welcomed the proposed changes, “Giving notice of the sale of assets to a connected party will allow for greater transparency. However, an individual creditor’s right to challenge the process must be balanced with achieving the most successful outcome.”
“I don’t think it is a particularly good idea,” Martin Williamson, director of Insolvency Practitioners Direct, said. “Generally speaking, a pre-pack is done because action needs to be taken quickly.”
He believes that the new proposed rules would cost time, money and jobs.
“There are already guidelines where before a pre-pack is done you canvas the creditors. Having to have a statutory three-day waiting period won’t change what we are trying to do but it will prevent some pre-packs from going through.”
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