The Insolvency Service has announced that new laws will require mandatory independent scrutiny of pre-pack administration sales where connected parties are involved in the purchase.
Pre-pack sales are often negotiated to sell part or the whole of a company’s business or assets prior to the company entering into administration. The aim of the pre-pack is to avoid insolvent liquidation of the business although the underlying trading vehicle may not be preserved in the process.
Critics of pre-packs claim that:
- There is little scrutiny of the process which is normally executed extremely quickly in order to preserve the underlying business and jobs.
- Assets are typically sold off at what is perceived as less than open market value.
- Arrangements made in respect of sales to connected parties, such as directors or shareholders are not always immediately transparent.
- Not all pre-packs are in the best interests of creditors and taxpayers.
Minister for Corporate Responsibility Lord Callanan said:
"Pre-pack sales play an important role in rescuing viable businesses while protecting jobs and supporting our economy. As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process.
This new law will ensure all sales to connected parties are properly scrutinized - protecting the interests of creditors and the general public, as well as the distressed company."
Further details on how mandatory scrutiny will be enforced will be provided in due course.
- The power to regulate connected party sales in administration in Section 129 of the Small Business, Enterprise and Employment Act 2015 lapsed in May 2020. It was revived by the Corporate Insolvency and Governance Act 2020, giving the Government powers to introduce regulation via affirmative secondary legislation.
- The legislation will apply to England, Scotland and Wales. Insolvency matters are devolved in Northern Ireland.
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The Insolvency Service, Pre-pack sales to face mandatory scrutiny