Pre-pack administration scrutiny tightened up

The government is to legislate for the mandatory independent scrutiny of pre-pack administration sales where connected parties are involved in the purchase

The new laws are designed to improve transparency during pre-pack sales, by requiring stricter independent scrutiny where connected parties - such as the insolvent company’s existing directors or shareholders - are involved.

In announcing the move, the government said that while pre-pack administration sales are widely considered to be a valuable rescue tool, concerns have been raised that arrangements may not always be in the best interests of creditors.

Lord Callanan, minister for corporate responsibility, said: ‘As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process.

‘This new law will ensure all sales to connected parties are properly scrutinized - protecting the interests of creditors and the general public, as well as the distressed company.’

The government will introduce regulations into Parliament in due course. The legislation will apply to England, Scotland and Wales. Insolvency matters are devolved in Northern Ireland.

Colin Haig, president of insolvency and restructuring trade body R3, said he broadly welcomed the announcement and in particular, the government’s decision not to ban sales to connected parties in pre-packs.

‘Pre-pack administration sales involving connected parties are an important rescue tool as they are often the best way of preserving a business and maximising returns to creditors.

‘The insolvency and restructuring profession is very sensitive to the impact of pre-packs on creditors, and there is a careful balance to strike in these situations between transparency, protecting creditor value, and business rescue, which these proposals support.

‘We welcome efforts to enhance confidence and transparency in pre-packs, but these efforts should be balanced against protecting the valuable role pre-packs play. These reforms, while not perfect, should help to improve confidence in this important business rescue tool,’ Haig said.

Ion Fletcher, director of finance policy at the British Property Federation, said: ‘We support the Insolvency Service’s proposed measures to require independent scrutiny of sales in administration to a connected person.

‘This will provide much-needed transparency and provide reassurance that a sale has been completed in a fair manner.’

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