Government’s move on pre-packs criticised by Hammond

THE GOVERNMENT’S proposed reform of insolvency laws, which introduces a three-day notice period for sales of insolvent ‘pre-packed’ businesses to connected parties, has been criticised by the Midlands region of national insolvency body R3.

According to R3’s regional chairman Matthew Hammond, a partner at PwC in the Midlands, the proposals could jeopardise returns for unsecured creditors as a three-day delay could result in a depreciation in the value of the business, leading to greater numbers of liquidations.

Matthew Hammond explained:  “A pre-pack is a deal for the sale of an insolvent company’s assets which is set up before the company enters a formal insolvency process.  The deal will usually have been agreed before the insolvency practitioner is appointed, but will be executed by the insolvency practitioner shortly after appointment.

“They are often a misunderstood insolvency tool, the benefits of which are frequently lost in the debate over their perceived impact on creditors, so any attempt to bring greater transparency to the pre-pack process is to be welcomed.

“In today’s economic climate, with a dearth of buyers and incredibly tight financing, a pre-pack is often the only option left in a large number of cases. Furthermore, the speed with which pre-packs are performed is crucial in maintaining value in a business which would otherwise be diminished once its severe financial difficulties become known to staff and customers.  A delay of three days is a long time in business.”

The Government’s announcement on the proposed insolvency reforms coincides with the annual Government report on insolvency practitioner compliance with (SIP 16) reporting on pre-packs.  The case for pre-packs is strengthened by the report, which indicates that there is “…no reliable evidence to suggest that misconduct by directors is any more prevalent in pre-pack cases than in conventional administrations.”   According to R3 research, sales to connected parties generally take place because there is no other buyer for the business and they occur in around 40% of business sales.

Mr Hammond said: “It would be better for the business rescue culture if the Government looked at ensuring suppliers are bound in the event of a formal insolvency or were prevented from making ransom payments, issues which we have already placed before the lawmakers.  Both of these proposals should help stabilise a business during the suggested three-day notice period for pre-pack sales.”