Partner Article

Government drops changes to pre-pack insolvency

Government proposals to overhaul the pre-pack insolvency sales process have now been dropped, to the dismay of business bodies.

The proposed improvements to legislation had caused controversy as it would leave creditors unpaid following the administration and sale of a business.

In a statement, the Employment Minister Edward Davey said that Government was not convinced of the benefits having “taken into account all of the issues.”

The Forum of Private Business responded to the developments with apprehension, suggesting Government should go even further towards protecting creditors from so called ‘phoenix companies.’

Research from the Forum, under the ‘cost of compliance’ survey, revealed that UK small businesses are owed more than £33 billion in outstanding invoice payments.

Senior Policy Adviser at the Forum, Alex Jackman, said: “Cutting red tape is hugely important but, against the backdrop of the Government’s de-regulatory agenda this is one area where tighter legislation would protect more firms from ‘phoenix’ companies abusing the pre-pack insolvency process by starting again while failing to pay them.

“Late payment, or in this case non-payment, devastates firms’ ability to maintain any kind of healthy cash flow and threatens their very survival.

“The Government is working on some extremely positive projects at present to help firms minimise the problem and offering them more protection in this way would also be of great benefit.”

Mr Davey had argued that pre-pack sales can offer flexibility in business rescues when used properly.

However, the Forum had expressed concerns over the abuse of the process, for example when an existing management team or associates are able to effectively buy back the company without consultation with creditors.

Often such actions are carried out deliberately with the express purpose of avoiding paying debt.

Under the new proposals, insolvency practitioners would need to give three days notice ahead of a pre-pack sale, to allow for challenges.

The Forum had backed such steps, along with proposals to ensure best value sale prices to benefit creditors, but made further recommendations.

These included strengthening the Statement of Insolvency Practice, with penalties for non-compliance; tightening rules against directors involved in multiple pre-pack insolvencies; prevention of administrators actively promoting pre-packs; and more robust scrutiny from the Insolvency Service.

Mr Davey had said that officials were asked to undertake an ‘urgent review’ in conjunction with stakeholders of how the existing controls on pre-packs have been working and whether more could be done to improve confidence and transparency.

Allan Kelly, partner at Tait Walker chartered accountants, said: “Pre-packs have been in existence for a long time. It is not the notion of a pre-pack that it wrong, it is how they are perceived by creditors.

“It can be readily demonstrated that pre-packs help preserve value in a business and maintain employment.

“The proposed changes to the legislation would have led to more closures or liquidations which would lead to increased job losses and lower creditor returns.

“Legislation is already in place which sets a framework for the insolvency practitioner to inform creditors of key facts surrounding the pre-pack sale.

“I do however welcome the Governments comments that more should be done with monitoring this framework as it is important to improve confidence and transparency about the process to creditors.

“Ultimately, in any insolvency situation, certain parties will be more affected than others and naturally will feel aggrieved by the position they have been exposed to. It is up to the insolvency practitioner to ensure through effective communication that these creditors feel that the best has been achieved in bad circumstances. “

This was posted in Bdaily's Members' News section by Tom Keighley .