Talking Point: Pre-pack changes could boost transparency but mean more liquidations
Robert Adamson, deputy chairman of insolvency trade body R3 in Yorkshire, takes a look at the latest government proposals for pre-packs including the contentious three-day rule. Adamson is also partner in business recovery services at Mazars in Leeds.
Over the years, pre-packs - or sales completed immediately on formal insolvency often to connected parties - have attracted much criticism. The main concern has been over lack of transparency as there is usually little or no marketing. However, following regulations implemented in January 2009 requiring administrators to provide a full report explaining why a pre-pack was preferable, a higher degree of public scrutiny has been possible.
Insolvency Practitioners will tell you that pre-packs are a useful tool in their armoury - often the only way of enabling a business to continue and saving jobs. The main benefit of the pre-pack process is its speed as a business can continue trading without a crucial loss of confidence by suppliers and customers.
However, in an attempt to bring greater transparency to the process, the government announced in March that it proposed to introduce a three-day notice period for pre-pack sales to connected parties. While any measure that boosts confidence in the pre-pack procedure is to be broadly welcomed, many in the insolvency profession fear this could actually result in unsecured creditors losing out as more businesses are liquidated rather than pre-packed.
Pre-packs are usually chosen because of the speed of the procedure which helps preserve the value of the business. Three days is a long time in business, and, in fact, a three-day proposal is likely to end up being six days – if an IP is appointed on a Monday, the three days will start from Tuesday, meaning that an entire working week has been lost.
Vital staff, customers and goodwill will be at risk if the business is unable to trade during this cooling off period, putting corporate rescues in jeopardy. When faced with this option, directors may simply decide that liquidation is a better route, but 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. R3 has put these ideas to government as part of our ‘holding rescue to ransom’ campaign. If the government 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.