Pre-pack rules could mean insolvencies rise, says R3
Government proposals to introduce a three-day notice period for pre-pack sales could mean unsecured creditors lose out as more businesses are liquidated instead. That's according to trade body R3.
R3 said that any attempt to bring greater transparency to the pre-pack would be welcomed – but warned a consequence of a delay could be the value of a business depreciating.
Andrew Walker from R3 said: "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 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, the business 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."
According to the government's monitoring report on pre-pack compliance, there is "no reliable evidence to suggest that misconduct by directors is any more prevalent in pre-pack cases than in conventional administrations".
Sales to connected parties tend to happen because there is simply no other buyer at the table, said R3. The type of sale occurs in 40 per cent of business buys.
Walker said: "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. If the 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."
