What is a Pre-Pack Administration?
Pre-pack administration is a formal insolvency procedure in which a company arranges to sell all or a substantial part of a company’s business and/or assets prior to entering administration. The administrator then completes the sale on or shortly after their appointment.
Pre-packs are a common rescue mechanism but have been subject to scrutiny for a number of years. An independent review, commissioned by the government and led by Dame Teresa Graham in 2014 (the “Graham review”), highlighted a lack of transparency and trust for unsecured creditors, especially where the sale is to a connected person.
The Graham Review
To address these concerns, the Graham Review put forward a number of voluntary industry-led measures. One key recommendation was the formation of a group of independent and experienced business people which could be approached to offer an opinion on the purchase by connected parties to the company.
The government also inserted paragraph 60A into Schedule B1 of the Insolvency Act 1986 giving Parliament the power to ban or regulate pre-pack sales to connected parties. The power expired in May of this year but was extended until June 2021 by the Corporate Insolvency and Governance Act 2020 (CIGA 2020).
The Reform to Pre-Pack Administrations
In many cases, a pre-pack administration deal may be the only rescue option available to a company and its employees. However, fresh concerns have been raised over the potential increase in pre-pack sales during the current COVID-19 pandemic and the detriment to creditors as a result. The government evaluated the uptake of the Graham Review recommendations and has concluded that there is “still room for further transparency”.
The government does not want to prohibit pre-pack administration sales to connected parties altogether but it has announced plans to introduce new legislation before the June 2021 deadline, which will provide for a mandatory independent opinion on all pre-pack sales in administration to a connected person. The administrator will be unable to dispose of a company’s property to a connected person within the first eight weeks of administration without either the approval of the creditors or the independent written opinion.
If the administrator proceeds to dispose of the property in cases where the independent opinion is not in support of doing so, they will be required to provide a statement setting out the reasons for doing so.
Non-legislative measures include guidance to accompany the new legislation to ensure SIP16 statements are compatible with the legislation and improve the quality of the information provided to creditors.
The announcement will be no surprise to industry experts and is welcome news to those creditors who feel government support has, more often than not, been debtor-friendly.
A full copy of the report can be found at https://www.gov.uk/government/publications/pre-pack-sales-in-administration/pre-pack-sales-in-administration-report#about-the-governments-review
Posted on November 16, 2020