Pre-packs - do they have a future?

Pre-packs - do they have a future?


Author: Andrew Pickin

In June this year Teresa Graham published her Report on Pre-pack Administrations. As Vince Cable noted in his foreword to the Report: 'Pre-pack administrations has been much criticised in some quarters in recent years'.

Critics of the process have agreed that it lacks transparency and does not result in the best value being achieved for businesses which are sold to the detriment of unsecured creditors.

The Graham Review made a number of recommendations to try to improve the reputation of this procedure. These include:

  • Connected parties to a proposed pre-pack deal should, on a voluntary basis, disclose details of the deal to a so called "pre-pack pool" for the pool to comment on. This sounds complicated and it remains to be seen whether in practice such arrangements will work out.
  • The connected party, again on a voluntary basis, completes a viability review on the new company.
  • The circular to creditors from the insolvency practitioner notifying them of the content of a pre-pack arrangement is strengthened in various key areas.
  • All marketing of the pre-pack business must comply with six principles of good marketing.
  • The status of valuers giving valuations which underpin the pre-pack transaction must have PI insurance.

There is an important sting in the tail of the Report however which should not be overlooked. After 66 pages of review and detailed recommendations the Reports states: "Should these measures fail to have the desired impact .. the Government should consider legislating." The Government has not needed much encouragement to adopt this suggestion and has proposed in the Small Business, Enterprise and Employment Bill published on 26 June to create a reserve power to prohibit pre-pack administration sales to connected parties if certain criteria are not met, for use if non-legislative voluntary solutions do not have the desired effect.

It remains to be seen whether this provision represents the slow-burning fuse which may eventually bring an end to the use of pre-packs between connected parties. Time will tell but if the voluntary measures are not shown to be effective this is certainly now a real possibility.