Pre-packs continue to attract criticism in the UK as the UK Insolvency Service announces a review of the controversial administration procedure.
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 practitioners;
- 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 companies;
- 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.
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