Business experts’ review of pre-pack sales to increase trust in process

Directors, shareholders and others connected with an insolvent company can now have their proposed pre-pack acquisition of the insolvent business reviewed by an independent pool of experts in a move to improve trust and transparency in UK business rescue.

Pre-packs, which involve the sale of a struggling business being negotiated before it is put into administration and completed by the administrators shortly after their appointment, are the subject of a package of reforms from today.

The reforms follow the recommendations of an independent review into pre-packs for the UK government by Teresa Graham CBE in 2014.

The report acknowledged the economic benefits of pre-packs and highlighted the need for greater transparency for creditors, employees and directors in the process, particularly when businesses are sold to “connected parties” – those who are already involved with the company.

Last year, some 20,000 businesses went through an insolvency process, with less than 5 per cent involving a pre-pack.

Around two-thirds of those pre-packs involve purchasers already connected to the insolvent company, and it is in these cases that the additional scrutiny provided by the pool will be beneficial.

The reforms are backed by creditor groups, government, the insolvency profession, and regulators, with ICAS having been closely involved in the development of the new pre-pack pool.

Application to the pre-pack pool is voluntary and connected parties will be made aware of the pool by an insolvency practitioner.

The pool is made up of 20 independent senior business experts who will deliver a response within 48 hours.

The pool’s opinion on applications will be made available to creditors.

David Menzies, ICAS Director of Insolvency, said: “Pre-pack administrations are an important part of the UK insolvency regime which is recognised as being amongst the best in the world.

“They can play a significant role in helping to rescue businesses and jobs. Creditors and employees however, need to have trust and confidence in the process and the availability of the pre-pack pool will assist with providing that in a more transparent manner.”

Duncan Grubb, director of Pre-Pack Pool Limited, the body responsible for the pool said: “The reforms strike a balance between transparency and the discretion needed for business and job rescue.

“While the pool is voluntary and its opinions are not binding, it will reassure creditors about the reasonableness of the pre-pack transaction and its justification in the circumstances.”

“With enhanced guidance for directors on marketing and valuations, creditors can have more confidence that a pre-pack sale achieves the best deal for them too.”

Pre-pack Pool process explained

The connected party will make an application to the pre-pack pool via a secure, online portal.

Based on the information submitted, the independent pre-pack pool reviewer will issue one of three opinions:

The pre-pack is not unreasonable

The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided

Case for pre-pack not made

The pre-pack pool works on a “user-pays” principle. The process will cost £800 + VAT per application.

The opinion will be provided to creditors once the business sale has been completed.