Member Article

New Pre-Pack Administration Laws 'May Miss The Mark'

New laws to improve the use of pre-pack administrations may end up failing to meet the objectives they have been designed to achieve.

That’s the view of Alexandra Withers, North East chair of insolvency and restructuring trade body R3, after legislation designed to improve transparency in the pre-pack process completed its journey through the House of Commons.

The new legislation aims to improve stakeholder confidence in connected party pre-pack administrations, where the struggling business that is being sold is bought by a company or individual with existing links to it.

Connected party purchasers will now be required to provide an assessment of the sale’s fairness to creditors from an independent ‘Evaluator’, or to secure the agreement of the company’s creditors to the sale, if it takes place within the first eight weeks of the administration.

But while welcoming the general idea behind the new laws, Alexandra Withers is concerned that the lack of Government oversight of the Evaluator may mean the reforms fail to achieve their objectives.

The number of corporate insolvencies and incidences of pre-pack administrations are both expected to rise significantly once the current business support measures introduced by the Government to mitigate the impact of the pandemic begin to be removed.

According to the most recent official figures, there were 473 pre-pack administrations in 2019, with more than half of them (260) culminating in a sale to a connected party. Alexandra Withers, who is an associate solicitor in the insolvency department of Short Richardson & Forth Solicitors in Newcastle, says: “We welcome efforts to improve stakeholder confidence in pre-packs, but it may be proved that this legislation has missed the mark.

“Sales to connected parties in pre-pack administrations will now be subject to creditor approval, or review by the new independent Evaluator position.

“The rationale for this is clear, but given that the entire point of the reforms is to ensure that there is an independent ‘third pair of eyes’ reviewing these sales, the practicalities around ensuring that this is always the case could be where these regulations fall down.

“We recognise the difficulties the Government faces in legislating for this, but the responsibility for ensuring the suitability of the Evaluator position shouldn’t simply be outsourced to the market, which is effectively what the new laws do.

“Not enough has been done to set an appropriate framework that guarantees the Evaluator will be a ‘fit and proper person’ in each instance, and maintaining a list of approved Evaluators would have been, in our view, a far better option.

“This might have meant an additional administrative burden for them, but it would have given stakeholders greater confidence that these reforms were robust, rather than just the easiest option for the Government.”

This was posted in Bdaily's Members' News section by Julian Christopher .