Creditors could be given notice ahead of pre-pack deals

The Government has commissioned a probe of administrations which allow firms that are about to collapse to be restructured and sold to new owners – typically the existing management – without the consultation of unsecured creditors.

The Insolvency Service, the industry regulator, admitted that the review could revive a plan to give connected parties three days notice ahead of a pre-pack, reports The Telegraph.

A “grace period” was originally proposed by the Government in 2011 but later shelved amid concerns that it would publicise a company’s difficulties and lead to an erosion in value of its assets.

However, creditors representatives argue that tougher rules are needed to stop abuses of pre-packs, and for a notice period to allow creditors to express concerns about the sale process or make a higher offer for the assets.

High profile cases include beds retailer Dreams, lingerie outlet La Senza and property agent DTZ, whose sale left unsecured creditors with nothing.

Carole Hughes, managing director of credit management business Daniel Silverman, welcomed the review. “Pre-packs [are] often grossly unfair to creditors and stronger controls are needed. I have witnessed first hand the devastating effect it causes to our clients’ businesses, some of whom have ceased trading as a result.”

Sometimes, creditors do not even realise that a pre-pack has taken place until they contact a customer to chase payment.

The Insolvency Service said the review “will enable further evidence to be assembled on how pre-packs are working in practice and whether further steps are needed [to increase transparency and prevent abuse].”

Graham Horne, the Insolvency Service’s deputy chief executive, said: “Pre-packs [often] preserve value and jobs but they look bad in some cases and they can be used as a mechanism of abuse. It’s an area that causes concern so we’re having an independent review to see what can be done. It could bring the three-day period back on the table – or something else.”

The Insolvency Service said the review will be launched in “late Spring”.
A spokesman for R3, the insolvency profession’s trade body, said: “We recognise the concerns from within the creditor community about the pre-pack process, particularly over connected party sales, and we hope this review will help to increase confidence in the regime and highlight the vital role pre-packs play in saving businesses and jobs.”

R3 said that “key changes” could “boost transparency and confidence in the process”.

“Creditors should be granted the option to appoint an independent liquidator. This would enable the sale to be properly assessed and allow for wrongdoing by any party to be tackled.”