Edward Judge - a Partner in our Restructuring and Insolvency team based in London - comments on the Government's report into the pre-pack administration process.
The Government has remained concerned with the practice of selling the business and assets of insolvent companies back to the incumbent directors and shareholders through the pre-pack sales process which involves little or no involvement with or approval by the company’s creditors.
To the casual observer, it does look like a process which is open to abuse as the former director/shareholder of the insolvent company obtains the business assets of the insolvent company at what appears to be a significant discount and without the former debts attached to that business. However, there have been a number of independent studies that have found that the prices paid by these director/shareholders are likely to be more than would otherwise have been obtained by an administrator in a general sale and that the pre-pack process is more likely to preserve jobs than other processes.
Since November 2015, there have been voluntary industry measures in place (such as the pre-pack panel, a group of experienced, independent business people who offer an opinion on proposed pre-pack sales) which has received little engagement on such transactions and appears to have not succeeded in alleviating creditor concerns.
The Government has now published its report into the pre-pack process and the recommendations are to bring in regulations to force the connected party purchaser to obtain a written opinion from an independent “opinion provider” before the sale can proceed.
The opinion provider must make a decision one way or the other as to whether the assets should be disposed of in the way suggested or that they should not be sold in that way. Even where a report suggests that the proposed disposal should not proceed, the administrator can still proceed with the disposal but must provide a statement setting out the reasons for doing so.
There are also non-legislative provisions in the report suggesting that the Government will make sure that the administrators carry out marketing and comply with existing insolvency regulations.
The existing regime where the parties can refer the matter to a pre-pack pool seems to have had the effect of slowing down the transaction without any discernible benefit to the creditors. It’s difficult to see how this independent review would havea different effect unless the independent expert will be able to work quickly. I also hope that the delay and costs associated with such a report will not affect the viability of the sale.
Pre-pack sales where connected parties, such as the insolvent company’s shareholders or directors, are involved in the process will be required by law to undergo independent scrutiny, the government announced today.