New rules designed to make it harder for business owners to regain control of failing companies through ‘pre-pack’ administrations have divided entrepreneurs and insolvency practitioners.
The Government has unveiled measures aimed at improving “transparency and confidence” in pre-pack sales, which allow businesses that are about to go under to be quickly sold to new owners – often the original directors – without the consultation of unsecured creditors.
The proposals, which include a three-day notice period for connected parties ahead of a deal, come after much criticism of pre-packs for a perception they make it easy to leave creditors and customers in the lurch.
Insolvency firms say the measures stand to hold back administrators and jeopardise returns for unsecured creditors.
David Caro, chairman of the Federation of Small Businesses in the West Midlands, believes that while pre-packs have been positive for entrepreneurs who go into insolvency due to circumstances out of their control, there needs to be more help for creditors.
He said there should be more responsibility placed on companies to repay old debts after going through pre-pack administrations and returning to profitability.
Mr Caro added: “I would like to see the cost of insolvency reduced so more goes back to the businesses and not into the pockets of insolvency practitioners.
“I would also like to see banks lining up along with everyone else when it comes to getting money out of businesses.
“And we have got to be careful about not opening a gate to dubious people. As long as that is done, then I am quite happy about pre-packs.”
In recent years the Post has reported on pre-packs involving Europackaging, Cobra Beer and Broad Street pub The O Bar.
And 400 jobs have been preserved in the past week by administrators at Grant Thornton agreeing a pre-pack at men’s fashion chain Officers Club.
Martin Williamson, director of North Staffordshire firm Insolvency Practitioners Direct, said bringing in a delay to the administration process stands to cost time, money and jobs.
He said: “I don’t think it is a particularly good idea. Generally speaking a pre-pack is done because action needs to be taken quickly, either for the preservation of the business or to maximise an asset.
“There are already guidelines where before a pre-pack is done you canvas creditors.
“Having to have a statutory three-day waiting period won’t change what we are trying to do but it will prevent some pre-packs from going through.”
Edward Davey, the business, innovation and skills minister, said the measures would give creditors a chance to “express concerns, which the administrator would need to consider, or make a higher offer for the assets”.
As part of the changes, administrators would need to include an explanation of why a pre-pack administration was carried out in records held at Companies House, allowing credit reference agencies and suppliers to judge the viability of the new business.
Administrators would also be required to confirm that the sale price, in their view, represented best value for the creditors.
He added that the new rules, which could become law before the end of the year, would apply to any sales back to connected parties in an administration where there has been no open marketing of the assets.
Insolvency trade body R3 said that as a consequence of the proposals there would be increased liquidations, meaning more unsecured creditors losing out.
The body’s regional chairman Matthew Hammond, a partner at PwC in the Midlands, said: “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 British Property Federation welcomed the proposals, but warned that the reforms would not give landlords enough time to scrutinise phoenix companies.
James Anderson, assistant director of the British Property Federation, said: “More time should be given to creditors for them to analyse pre-pack deals to connected parties.
“The three-day period is not sufficient in our view, and should be extended to one week.”