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Pre-packs endorsed by the Government

After examining the use of pre-packs as an insolvency tool, the government has abandoned the idea of legislating to give notice to creditors in all pre-packs and concluded that:

"Pre-pack sales can offer a flexible and speedy means of business rescue and when used appropriately can be the best way of maximising returns for creditors."

The challenge that the Minister has laid down to insolvency regulators is to ensure that pre-packs are used "appropriately".

This is the right result, but insolvency practitioners should respond by using pre-packs well and, most importantly, explaining clearly and promptly why each pre-pack produces the best outcome in its particular circumstances.

The written ministerial statement issued on 26 January 2012 (extracted from Hansard) follows:

WRITTEN MINISTERIAL STATEMENT
EDWARD DAVEY, MINISTER FOR EMPLOYMENT RELATIONS, CONSUMERS AND POSTAL AFFAIRS; DEPARTMENT FOR BUSINESS, INNOVATION AND SKILLS
PRE-PACKAGED SALES IN INSOLVENCY
In March 2011 I announced that we would be taking steps to improve the transparency and confidence of pre-pack sales in insolvency. We subsequently consulted interested parties on measures targeted at the sales of assets in insolvent companies where these are sold to connected parties (such as the directors or their close associates).
Pre-pack sales can offer a flexible and speedy means of business rescue and when used appropriately can be the best way of maximising returns for creditors. However, everyone who is affected by insolvency is entitled to have confidence that insolvency procedures are used fairly and that insolvency practitioners deliver the best possible outcome for all creditors.
It is apparent that concerns remain about the use of pre-pack sales, particularly where the assets are sold to a connected party – something that is often referred to as ‘phoenix-ism’. 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. I also believe that it is important to consider the effect of pre-pack sales on competitors in the market.
Following the announcement, BIS officials have discussed the merits and practical application of the proposed measures with a range of interested parties, including secured and unsecured creditors, insolvency practitioners, and business representatives.
Having taken account of all the issues, however, the Government is not convinced that the benefit of new legislative controls presently outweighs the overall benefit to business of adhering to the moratorium on regulations affecting micro-business which is an important plank of this Government’s deregulatory agenda. As much of the concern was related to small businesses, I do not consider that measures should be introduced just for businesses other than micro-businesses. It is for this reason that I am today announcing that the Government will not be seeking to introduce new legislative controls on pre-packs at this time.

 

 

Date: 27th January, 2012
Author: Chris Laughton

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