Pre-pack Administration — New Draft Regulations

The UK Government has published draft regulations introducing independent scrutiny of pre-pack administrations where businesses in administration and/or their assets are sold to a connected party. 

FPM Restructuring & Recovery Director, Seamas Keating explains what pre-pack administration is and answers your frequently asked questions.

Earlier this month (8 October 2020), the Insolvency Service published draft regulations to require mandatory independent scrutiny of pre-pack administration sales where connected parties are involved in the purchase of a distressed business or its assets. The purpose of the new regulations is to enhance transparency and give creditors greater confidence in the pre-pack administration process.

What is pre-pack administration?

Pre-pack administration is where the sale of company’s business and/or assets is agreed in advance of a formal insolvency process. The sale is completed when the company enters administration. Pre-pack administration is often the most viable business rescue option for distressed businesses in difficult economic times.

What is the advantage of pre-pack administration?

A key advantage of pre-pack administration is that the speed of the process enables greater value to be preserved in the business whereas in a longer, drawn-out insolvency process the value of goodwill and assets often reduces.

Why is the Government introducing new regulations?

Concerns have been raised about the transparency of the pre-pack administration process where businesses and/or their assets are sold to connected parties. The purpose of the new regulations is to improve transparency, reassuring creditors and the general public that their interests are being protected.

How will the draft regulations change the pre-pack administration process?

Up to now, there was a voluntary option to have a pre-pack sale assessed by an independent specialist. The new regulations will require pre-pack sales either to obtain approval by creditors or to obtain a written opinion of the sale from a suitably qualified independent person. This opinion will be made available to creditors and to Companies House. Any administrator proposing a sale outside of the regulations will have to make a report to creditors explaining the position.

Are there other Covid-19 business rescue options?

Yes. Previously on this blog we have covered other insolvency options such as Company Involuntary Arrangement, informal restructuring and liquidation. We also discussed the new scheme of arrangement and a moratorium giving companies breathing space from creditors which were among the measures introduced in the Corporate Governance and Insolvency legislation earlier this year. Our Restructuring & Recovery team can help you assess these options taking into account your specific circumstances.