Pre-pack Administration Deals to Face Mandatory Independent Scrutiny

The government is introducing new laws that will soon mean pre-pack administration deals involving connected parties are subject to independent scrutiny as a matter of course.

Expectations are that the new policies will have the effect of making pre-pack administration processes more transparent and better able to protect the interests of creditors and the general public.

The Insolvency Service has said that the more stringent rules around pre-packs will boost confidence in insolvency processes more generally and thus help protect jobs and the wider economy.

Connected parties are often involved in the transactions that take place within pre-pack administration procedures, which are deployed generally as a means of preserving value and saving jobs at financially distressed companies.

The Insolvency Service describes pre-packs as being widely viewed as a “valuable rescue tool” but notes as well that they can sometimes be seen as not being in the best interests of creditors, particularly where connected parties are involved.

For the purposes of the incoming laws, connected parties are taken to be existing directors or shareholders of businesses that are entered into pre-pack administration deals.

It is where these kinds of relationships are in evidence that independent oversight and scrutiny will now need to be applied, the Insolvency Service has explained.

“Pre-pack sales play an important role in rescuing viable businesses, while protecting jobs and supporting our economy,” Lord Callanan, minister for corporate responsibility, has said.

“As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process,” he added.

“This new law will ensure all sales to connected parties are properly scrutinised - protecting the interests of creditors and the general public, as well as the distressed company.”

Colin Haig from the insolvency and restructuring trade body R3 has said there is a careful balance to be struck around pre-pack administration deals between transparency, protecting creditor value and being able to successfully rescue struggling businesses.

Mr Haig has said the Insolvency Service’s new laws will support that balance while also recognising the important role that pre-pack deals can play in rescuing distressed businesses and returning maximum value to creditors in administration cases.