Pre-packs continue to attract criticism in the UK as the UK
Insolvency Service announces a review of the controversial
Faced with increasingly vocal stakeholder calls for reform, the
UK Insolvency Service recently announced that it has commissioned a
review of pre-pack administrations.
"Pre-packs" is the name given to the process of the
sale of a distressed company's business prior to its impending
administration or liquidation, where an insolvency practitioner is
engaged by a company's management to provide advice and
assistance with the planning and negotiation of a sale of the
company's business before the same practitioner is formally
appointed as administrator to the company. Once appointed, the
practitioner who negotiated the sale will ratify the sale contract.
The purchaser is often a related entity.
Some of the issues the review is set to investigate include:
Whether businesses are being sold at under-value, especially
where the sale is to a previous owner or connected party with no
open market valuation;
Possible conflicts of interest for insolvency
Lack of involvement of unsecured creditors, who are usually
informed of the sale only after it has taken place;
The role of advertising targeted at directors of distressed
Providing an unfair market advantage by allowing the new
company to leave behind its unwanted debts; and
Causing longer economic harm by allowing in efficient
businesses to carry on trading.
Pre-packs have become an accepted part of the UK insolvency
landscape over the last decade, with popularity increasing since
the global financial crisis. The UK Insolvency Service estimates
that of 2,808 UK companies which entered administration in 2011,
25% of used the pre-pack procedure, and 80% of those pre-packs
involved sales to related parties.
The pre-pack model is gaining traction in Australia. Here,
however, the practitioner appointed as administrator to the company
is always independent from the practitioner who provided the
initial advice on the arrangement and sale of business. Even with
that distinction, the Australian pre-pack model has not been
without its critics.
The main obstacle to acceptance in Australia of the UK pre-pack
model is the robust practitioner independence requirements
enshrined in Part 5.3A of the Corporations Act and the Code of
Professional Practice published by the IPAA.
No doubt the outcome of the UK review will be watched carefully
by Australian pre-pack advocates and critics alike.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
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Courts, through judicial discretion, supervise the proposed transition from winding up to a deed of company arrangement.
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