No changes will be made to the pre-packaged administration regime despite concerns over the transparency of the system, the government has announced.
It comes despite a pledge made last year by insolvency minister Edward Davey that steps would be taken to improve the transparency and confidence of pre-packaged sales (“pre-packs”) in insolvency.
But after consulting at length with interested parties, including secured and unsecured creditors, Davey has announced the government is “unconvinced” that introducing further legislative controls would outweigh the burden of new regulation.
Instead, he has asked officials at the Department for Business, Innovation and Skills (BIS) to review the existing controls on pre-packs to see if more can be done within the current regulatory framework to improve confidence and transparency.
The findings of this review will be discussed further in the spring.
Despite the decision, Davey said he remained concerned about the potential for unsecured creditors to miss out in a pre-pack scenario when companies were sold below value.
“I am concerned about the potential for sales to be effected at an undervalue, particularly in smaller-value asset sales, where unsecured creditors may receive less than they should,” he said.
“I also believe that it is important to consider the effect of pre-pack sales on competitors in the market.”
Doug Scribens, claims analyst at credit insurer Coface, called for BIS to offer more funding to the Insolvency Service to tackle the abuse of the pre-pack process after the review had been held.
“It is a shame that the government has chosen not to make any changes,” he said. “However, I hope that if anything, the review by BIS results in a recommendation for more funding for the Insolvency Service to tackle the abuse of the pre-pack process by anyone blatantly using it as a way of avoiding the payment of debts.”
Frances Coulson, president of insolvency trade body R3, welcomed the decision, arguing that the government’s original intention to give creditors a three day notice period when selling a business to a connected party would have led to more business closures and job losses.
She said: “Pre-packs are a vital rescue tool which fare considerably better than alternatives in terms of the retention of jobs and returns to secured and unsecured creditors.
“We also urge the government to define ‘admin expenses’ which would help save thousands of jobs and businesses that enter administration every year. R3 has long campaigned for the implementation of legislation to clarify an administration expense to improve the UK’s business rescue culture.”
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