Warning on ‘pre-packs’

Proposed new rules to increase transparency in controversial ‘pre-pack’ administrations - where business owners seek to regain control of failing companies - could result in creditors being unpaid according to a Sheffield lawyer.

New measures, which could take effect by the end of the year, aim to improve confidence in how pre-pack administrations are structured. The current process enables businesses about to go into administration to be sold quickly – often to the existing directors and usually without any consultation with unsecured creditors – sparking concerns that creditors are open to abuse by directors.

The Government’s new rules will require administrators to give three days’ notice to creditors when proposing to sell a significant proportion of a company’s assets or business to shareholders or directors in circumstances where there has been no open marketing of the assets.

Matthew Dixon, partner at hlw Commercial Lawyers, said: “Although pre-pack sales can offer a flexible and speedy rescue for a failing company which should maximise potential returns for creditors, there is a danger that they are used solely for keeping the business in the same hands while leaving creditors unpaid.

“However, the risk which accompanies the new rules could result in the proposed three-day notice period for pre-pack sales - jeopardising the sale of a business altogether and prompting business owners to decide that liquidation is a better route. A delay of three days could lead to depreciation in the company’s value, diminishing the chances of a corporate rescue. This would then result in reduced returns for secured and unsecured creditors as well as fewer jobs saved.”

Mr Dixon says although Ministers are keen to ensure the process is seen to be carried out fairly and reasonably, it is vital that the Government strikes the right balance in saving jobs as well as reassuring creditors that the best possible deal has been done.