As confirmed in our blog of 3 February 2011 entitled Why pre-packaged administration?, pre-packaged administration sales have proved to be an extremely useful mechanism to ensure the survival of a companys trade, protection of jobs and to maximise the return to those owed money by a failed company. The benefits are outlined in more detail in the relevant blog (which is still available for viewing).
By its very nature, the process, which involves a pre-arranged sale, (sometimes to connected parties) is perceived with suspicion by stakeholders. Having been involved in a number of successful pre-pack business sales myself, I am very clear on the need to ensure that when embarking on such a sale, all other possible routes are considered, best practice is followed in relation to its implementation and all aspects are fully disclosed to creditors as the process will be, quite rightly, scrutinised.
Regrettably, there have been limited cases of abuse of this process by insolvency practitioners and directors alike, which doesnt help those of us who work hard to do what is ultimately right in difficult circumstances. This has given rise to calls for the process to be changed to root out such behaviour, which may include a minimum period of open marketing prior to any sale being agreed.
Such changes would be impractical and in my view, severely restrict the ability of properly constructed and beneficial pre-pack sales to proceed. Primarily, for the following reasons:
1. There may be insufficient time available to market a business fully, especially where creditor action is imminent;
2. The marketing process may well damage the value and viability of a business once its financial circumstances become apparent to the marketplace.
Thankfully, following a period of consultation, common sense has prevailed and the government has concluded that the current process and supporting regulation should not be changed. Rather, our Regulators should focus on ensuring that insolvency practitioners apply the process appropriately and come down hard on any abuse at the expense of wider stakeholder interests.
WRITTEN MINISTERIAL STATEMENT RELEASED IN JANUARY 2012
EDWARD DAVEY, MINISTER FOR EMPLOYMENT RELATIONS, CONSUMERS AND POSTAL AFFAIRS; DEPARTMENT FOR BUSINESS, INNOVATION AND SKILLS
PRE-PACKAGED SALES IN INSOLVENCY
In March 2011 I announced that we would be taking steps to improve the transparency and confidence of pre-pack sales in insolvency. We subsequently consulted interested parties on measures targeted at the sales of assets in insolvent companies where these are sold to connected parties (such as the directors or their close associates).
Pre-pack sales can offer a flexible and speedy means of business rescue and when used appropriately can be the best way of maximizing returns for creditors. However, everyone who is affected by insolvency is entitled to have confidence that insolvency procedures are used fairly and that insolvency practitioners deliver the best possible outcome for all creditors.
It is apparent that concerns remain about the use of pre-pack sales, particularly where the assets are sold to a connected party something that is often referred to as phoenix-ism. I am concerned about the potential for sales to be effected at an undervalue, particularly in smaller-value asset sales, where unsecured creditors may receive less than they should. I also believe that it is important to consider the effect of pre-pack sales on competitors in the market.
Following the announcement, BIS officials have discussed the merits and practical application of the proposed measures with a range of interested parties, including secured and unsecured creditors, insolvency practitioners, and business representatives.
Having taken account of all the issues, however, the Government is not convinced that the benefit of new legislative controls presently outweighs the overall benefit to business of adhering to the moratorium on regulations affecting micro-business which is an important plank of this Governments deregulatory agenda. As much of the concern was related to small businesses, I do not consider that measures should be introduced just for businesses other than micro-businesses. It is for this reason that I am today announcing that the Government will not be seeking to introduce new legislative controls on pre-packs at this time.
The Insolvency Service, an executive agency of BIS, already monitors compliance by insolvency practitioners with the professional standard Statement of Insolvency Practice 16 (Pre-packaged Sales in Administrations) which requires administrators to provide creditors with early post sale information on details of the sale and the justification for it.
I have asked BIS officials to now undertake an urgent review in conjunction with stakeholders of how the existing controls on pre-packs have been working and whether, in light of their experiences and the outcomes from the monitoring, more could be done within the existing regulatory framework to improve confidence and transparency. The issues raised by pre-packs are important matters that affect a wide range of stakeholders including business interests, and I look forward to discussing the findings of the review with stakeholders in the spring.
Read our previous article related to this article on Pre-packaged administration.