Mandatory scrutiny of pre-pack administrations provides long-term credibility

Mandatory scrutiny of pre-pack administrations involving connected parties will inject some long-term credibility into the process while appeasing its critics, according to one leading insolvency professional.

The government has recently announced that it will be introducing regulations in the near future that make it mandatory for every pre-pack administration to be scrutinised by a third party – where connected parties are involved in the purchase.

A pre-pack administration is an arrangement to sell part or the whole of a company’s business or assets prior to the company entering into administration, and the sale is completed on or shortly after an administrator’s appointment.

Those in favour of the process argue that it helps to preserve the value of a business while saving jobs, whilst those against argue that unsecured creditors are often disadvantaged and left empty-handed as a result of transactions between connected parties, where it is possible for debt to be cleared without repayment.

The announcement by government comes after an independent panel – called the Pre-Pack Pool – was created in 2015 to scrutinise pre-pack administrations, but this was not compulsory and was not used consistently.

Brendan Clarkson, insolvency expert and director at CVR Global, said: “There is no doubt that pre-pack administrations have left many creditors out of pocket over the years, but the new law will ensure all sales to connected parties are properly checked – giving creditors and the public a clearer and trustworthy process.

“This move by the government can only be a good thing for the long-term future of pre-pack administrations as they are an important rescue tool, and are often the most effective way of preserving a business and ensuring maximum returns to creditors.

“Good restructuring professionals are always aware of the impact that any pre-pack sale is going to have on the various stakeholders involved and so will strive to strike a fair deal, but this move by the government is a much-welcomed vote of conference in what is an important insolvency process.”