Pre-pack sales – Govt introduces more controls

New regulations will come into force on 30 April 2021 with the aim of remedying perceived concerns arising from “pre-pack” sales in Administration.

A “pre-pack” is a planned insolvency procedure in which the assets and business of an insolvent company are sold by the Administrator to a pre-designated purchaser (often a connected party such as a director) on or soon after commencement of the Administration.  The proceeds of the sale are then applied within the Administration.  A pre-pack often enables the business of the insolvent company to continue operating through a new legal entity thereby, amongst other things, preserving jobs and the possibility of further orders for suppliers.

Pre-pack sales are generally regarded by those in the insolvency profession as an effective tool for asset realisation and are often the only realistic option for realisation of the business and assets of the company, producing, as a result, a more favourable outcome than would be the case if the company were to simply proceed immediately into liquidation.

Safeguards are currently in place, including, (pursuant to the Statements of Insolvency Practice (“SIPS”) (in particular SIP16)), the disclosure required to be given in relation to any pre-pack sale.  Notwithstanding that, there are often issues raised concerning, amongst other things, a lack of transparency and/or whether or not the best price has been secured.  For example, whilst there are often legitimate commercial reasons why that may be the case, creditors will often be unaware of the pre-pack sale until the transaction has taken place which can lead to unwarranted but legitimate concerns as to the nature of the process followed.

The underlying basis of those concerns stems from a perception that the business is being transferred free of its debts, often to the very person or persons (i.e. the director(s)) who caused, allowed or were at the very least in control when the company became insolvent.

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (“the Regulations”) will introduce conditions in respect of a substantial disposal by an Administrator, and broadly speaking will require either:

• the approval of the disposal to be obtained from the company’s creditors; or
• a qualifying report to be obtained in respect of the disposal.

To read the Regulations in full, click here.

The Regulations are aimed at improving transparency and creditor confidence in the pre-pack Administration process.  Precisely how the Regulations will operate in practice and the impact and knock on effect they will have on the incidence and viability of pre-pack sales remains to be seen and will, no doubt, be watched with interest.

We are here to offer advice and assistance throughout these turbulent times.  For further information in relation to the detail of the Regulations and/or if you wish to discuss any insolvency related issues (personal or business), please contact John Bradshaw or Sarah Mower, dedicated insolvency specialists in our Insolvency & Business Recovery Team.

John Bradshaw is a partner and specialist in Insolvency & Business Recovery at Barker Gotelee Solicitors.

Suffolk Insolvency Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email [email protected]