New 'pre-pack' rules to better protect creditors

The insolvency trade body R3 opposes the plans. It claims the three-day notice period could cause a sudden loss of customers

The Government will unveil a new draft regulation as early as next month that could make it harder for insolvency practitioners to push through controversial pre-packaged (pre-pack) administrations.

The Department of Business, Innovation and Skills (BIS) plans to inject greater transparency by introducing a new rule that will require an administrator to give creditors three clear days advance notice if they propose to sell a significant proportion of a business to a connected party, where there has been no open marketing of the assets.

Pre-pack administrations – often dubbed "phoenix" rescues – are when a company is placed into administration and then sold quickly to pre-selected new owners with reduced liabilities. Crucially, insolvency practitioners do not currently have to give notice to unsecured creditors, although the permission of secured lenders, such as the bank, is required.

However, R3, the insolvency trade association, opposes the plans, arguing the three-day notice period could lead to a sudden loss of customers, suppliers and associated revenues at a company. It argues this might result in more directors opting for a liquidation, which would lead to significantly more job losses and reduced returns for both secured and unsecured creditors than under a pre-pack.

Frances Coulson, the president of R3, said: "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, it's at risk of losing key staff and customers." The draft regulation is expected in late September or early October, but BIS declined to comment on a timeframe.

This year, UK companies including the fashion chain Jane Norman, the music group EMI and the mortgage broker John Charcol have been put through a pre-pack administration after they were unable to pay their debts in a dire consumer environment.

Ms Coulson said: "It is crucial the UK's business rescue culture is as effective as it can be and pre-packs play a part in that." She added that insolvency practitioners are already required to provide creditors with significant information as to why a pre-pack was used instead of another insolvency procedure.

However, in March, Edward Davey, the BIS minister responsible for insolvency, said he wanted to make sure "creditors have a fair chance to have their voice heard". He also pointed out that competitor firms who pay their debts in full also suffer, as rivals that implement a pre-pack emerge with substantially reduced liabilities.

A BIS spokesman said: "Discussions on the detail of draft legislation are currently taking place with stakeholders."

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