Pre-pack administrations may require mandatory independent scrutiny where connected parties are involved, it has been revealed.
The draft regulations, laid out in Parliament this February, aim to improve transparency and confidence in the insolvency regime.
A pre-pack is a special type of arrangement where the sale of all or part of a company’s business and assets are negotiated and agreed upon before an insolvency professional is appointed.
Considered a “valuable rescue tool”, pre-packs facilitate a “quick and relatively smooth” transfer of a business, allowing trading to continue uninterrupted.
However, recent high-profile deals involving connected parties – such as the insolvent company’s existing directors or shareholders – have brought pre-pack administrations under the media spotlight, triggering a review of the laws.
Under the proposed legislation, any pre-pack administration involving connected parties will be made subject to “mandatory independent scrutiny” to ensure that creditors are getting the best deal.
Commenting on the new rules, Colin Haig, President of insolvency and restructuring trade body R3, said: “Pre-pack administration sales involving connected parties are an important rescue tool as they are often the best way of preserving a business and ensuring maximum returns to creditors.
“The insolvency and restructuring profession is very sensitive to the impact of pre-packs on creditors, and there is a careful balance to strike in these situations between transparency, protecting creditor value, and business rescue, which these proposals support.”
Ion Fletcher, Director of Finance Policy at the British Property Federation, added: “We support the Insolvency Service’s proposed measures to require independent scrutiny of sales in administration to a connected person. This will provide much-needed transparency and provide reassurance that a sale has been completed in a fair manner.”
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