Everyone who is affected by insolvency whether they be employees, individuals struggling with debt, consumers who have lost deposits or suppliers who have not been paid are entitled to have confidence that insolvency procedures are used fairly and that insolvency practitioners deliver the best possible outcome in what are often difficult and challenging circumstances.
Today, Edward Davey announced measures that aim to improve the transparency of, and confidence in, pre-packaged (pre-pack) sales in administration cases.
He said:
“The merits of pre-pack sales have continued to be the subject of much debate. I recognise that such sales offer a flexible and speedy means of rescue and can be the best way of maximising returns for creditors.
"We do not wish to outlaw them. But they must be done fairly and reasonably. Particular concerns have been raised about sales of assets back to the current management, or other connected party, something that is often referred to as “phoenixism”.
"Where such sales are at undervalue, creditors get less than they should. Competitors who pay their debts in full also suffer. I want to make sure that creditors have a fair chance to have their voice heard.
"I also want to enable others to scrutinise such transactions after the event to ensure that deals being struck are fair in the circumstances.
"In order to inject greater transparency into the process we intend to require administrators to give notice to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party, in circumstances where there has been no open marketing of the assets.
"This will enable creditors to express concerns, which the administrator would need to consider or, where the circumstances justify it, apply to the court to prevent the sale from taking place.
"Administrators already need to provide a detailed explanation of why a pre-pack sale was undertaken to creditors in compliance with professional standard Statement of Insolvency Practice 16.
"These will in future need to be included in their administration proposals which are lodged at Companies House, making the information available to business as a whole, including credit reference agencies. Administrators will also need to confirm that the sale price represents best value for the creditors.”
Nick Starling, the ABI's Director of General Insurance and Health, said:
"The changes to the insolvency process announced today by the Insolvency Service are a welcome step forward to improving fair treatment of unsecured creditors in the first sentence and providing more transparency in a process that up until now has largely taken place behind closed doors.
"The ABI has long campaigned for the rights of unsecured creditors, whose solvency has often been jeopardised by an insolvency regime that treats them unfairly and is open to abuse. Pre-packaged administrations lack transparency, and offer few opportunities for unsecured creditors to intervene in the insolvency process.
"The aim of ‘pre-packs' is corporate survival and to preserve jobs, which is something to be supported. However, this is often done while unfairly penalising unsecured creditors putting their solvency and workforce at risk."
Steven Law, President of R3, the insolvency trade body commented:
“Any measure that boosts confidence in the pre-pack procedure is to be broadly welcomed. However it is important to note that a pre-pack is chosen is due to the speed of the procedure which helps preserve the value of the business.
"Three days is a long time in business, and if unable to trade in that period, is at risk of losing key staff and customers. When faced with this option, directors may simply decide that liquidation is a better route, and this would reduce returns to both secured and unsecured creditors and result in considerably fewer jobs being saved than under a pre-pack.
“It would be better for the business rescue culture if the Government looked at ensuring suppliers are bound in the event of a formal insolvency or were prevented from making ransom payments.
"We have put these ideas to Government as part of our ‘Holding rescue to ransom’ campaign. If today’s proposals are to be taken forward we advocate that our ideas are also brought into statute to help businesses stay held together during the three day period.”
