Pre-pack administration arrangements will be subject to greater scrutiny under reforms announced by the government today (June 16).
It has accepted recommendations made by regulation expert Teresa Graham, who was commissioned to carry out a review of pre-packs by business secretary Vince Cable last summer.
Graham found there was concern about the fairness of these deals, in which a company enters administration only to be sold immediately to a pre-arranged buyer. To address this, she has made six recommendations aimed at making them more transparent, boosting survival rates of new businesses and improving financial returns to creditors.
She said pre-packs had a “unique place”, but there must be “major changes” in the way they are administered.
Business minister Jenny Willott said the government would introduce a range of voluntary measures, with a view to legislating at a later date “if necessary”.
One of the key recommendations is the creation of a “pre-pack pool”. This would encourage parties in a deal with an existing connection to the company going into administration to approach an independent third party to discuss details of the proposed sale, prior to the deal taking place. If the independent third party does not support the deal, this should be disclosed to creditors.
Interested parties will also be expected to complete a viability review of the company in administration, to ensure businesses with fundamentally unviable models are not allowed back into the marketplace “post pre-pack, shorn of old company debts, often to fail again”, Graham said.
Last year, 2,365 businesses in the UK went into administration. Of these, around 600 were subject to a pre-pack deal. Critics of pre-packs say they can lead to deals favouring the buyer, rather than creditors. But supporters say it is better to line up a buyer and agree an offer for the business before administration, as when Blacks Leisure was sold to JD Sports in 2012.
Willott said: “When these types of sales are carried out properly, they allow the viable parts of the business to continue operating and jobs are saved; but it is also important for those who are owed money to know they are getting the best possible deal.
“Teresa Graham has come up with a set of recommendations that will ensure people get back as much money as possible and make pre-pack deals more transparent.”
She said the government would work with businesses and the industry to implement Graham’s recommendations: “We will monitor progress closely and will take the power to legislate if necessary.”
A spokeswoman for the Insolvency Service, an executive agency of the Department for Business, Innovation & Skills, said the situation would be reviewed in three years.