New pre-pack administration rules start this week
New rules regarding pre-pack administrations come into force on April 30 as the UK addresses an issue that has angered creditors of failed companies for many years.
A pre-pack is where the sale of all or part of a company’s business and assets is settled with a buyer before administrators are even officially appointed.
Under the new rules — snappily called the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 — the process behind a pre-pack sale will become slower. With any administration that begins on after April 30 and where the administrators seek to dispose of all or substantial parts of the assets to a connected person within eight weeks of the start of the administration, certain steps have to be taken.
The administrators now need creditor approval before the sale can be completed or the buyer needs a written “qualifying report” from an independent Evaluator. The Evaluator could be a solicitor, accountant or insolvency practitioner.
That said, a negative report won’t stop a pre-pack going ahead and the Evaluator will be chosen by the buyer.
The rules are untested for now but will, at the very least, lead to more scrutiny of deals and will delay them, with what were sometimes-same-day pre-packs becoming a thing of the past.
With the larger number of failures in the past couple of years among fashion brands and retailers, pre-pack administrations have been seen more and more often.
Pre-packs can be beneficial as they mean a business can be rescued as a going concern with no interruption to its operations, also saving jobs. But they clearly have their downsides, including lack of transparency and the fact that many creditors are left out in the cold with little recourse if they’re unhappy about the deal.
This has led to such arrangements being seen as controversial, especially when the sale is to a company or person previously connected to the business, such as a director, senior management, or shareholder.
In this case, many creditors understandably feel that the business is in the same hands it was in before but without the obligation to pay money that it owed.
The lack of transparency around such arrangements, and the fact that creditors often lose out, has led to more than one review of the situation and an earlier solution whereby pre-pack sales could be reviewed by an independent person was seen as ineffective due to the fact that it wasn't compulsory.
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