Pre-pack sales continue to attract attention and create controversy. A pre-pack occurs when a deal is agreed for the sale of the business and assets of a struggling company prior to formal insolvency proceedings being instigated. The purchase is effected upon the appointment of the insolvency practitioner and the purchaser is very often a vehicle in which the directors/shareholders have a stake.
These deals are, for many, seen as the right course of action in certain circumstances as they can improve returns to creditors and help preserve the business of the failed company, thereby saving jobs.
However, pre-pack sales have also been criticised for a lack of transparency; hence the introduction by the Joint Insolvency Committee of new rules on 1 January 2009 (Statement of Insolvency Practice (SIP) number 16), which, among other things, are aimed at clamping down on any directors who misuse the administration process to disadvantage creditors or seek to gain benefit for themselves (see MacRoberts e-update - ‘New rules for insolvency practitioners in pre-pack deals’ dated 7 January 2009).
As a result of the introduction of these new rules, creditors may now have better access to information about the new owners of the business in question and greater clarity about the administration process.
Nonetheless, some critics are still of the view that a pre-pack sale allows businesses to walk away from their debts all too easily.
In response (and, perhaps, as part of a drive to recast the pre-pack sale as a legitimate restructuring tool in appropriate circumstances) the Insolvency Service has launched a complaints hotline on 0845 601 3546, inviting complaints from persons who wish to complain about a pre-pack administration or, indeed, feel they have been unduly disadvantaged by an administration. This hotline may also be used to complain about any other corporate insolvency process.
So, once again, those involved in or affected by pre-packs need to remain mindful of the increased scrutiny to which these deals can and are likely to be exposed.