Insolvencies could increase under new pre-pack rules, says R3
The government’s proposed reform of insolvency laws has been slammed by the Midlands region of national insolvency body R3. New legislation involves the introduction of a three-day notice period for sales of insolvent ‘pre-packed’ businesses to connected parties.
A pre-pack involves the sale of an insolvent company’s assets which is set up before the company enters a formal insolvency process.
According to R3’s regional chairman Matthew Hammond, a partner at PwC in the Midlands, the proposals could “jeopardise returns for unsecured creditors” as a three day delay could result in a depreciation in the value of the business. Hammond added this could lead to a greater number of liquidations.
Hammond said that pre-packs are often “a misunderstood insolvency tool”.
He added: “In today’s economic climate, with a dearth of buyers and incredibly tight financing, a pre-pack is often the only option left in a large number of cases. Furthermore, the speed with which pre-packs are performed is crucial in maintaining value in a business which would otherwise be diminished once its severe financial difficulties become known to staff and customers. A delay of three days is a long time in business.”
