Reed Smith In-depth

Hot on the heels of the landmark changes to the insolvency landscape brought by the Corporate Insolvency and Governance Act 2020 (CIGA) (see our previous article on CIGA), the Government recently announced reforms relating to pre-packaged administration sales to connected parties. The Government has published draft legislation that aims to provide greater scrutiny of pre-pack sales and ensure that such disposals are reasonable in the circumstances.
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What are pre-pack sales?

Pre-pack sales involve the sale of company assets (usually the entire business) by an administrator immediately upon or shortly after commencement of the administration. The marketing of the assets as well as the negotiations of the sale terms between the company and the purchaser occur confidentially prior to the opening of insolvency proceedings with the involvement of the proposed administrator.

Pre-pack sales are a useful tool to enable a quick and smooth transfer of company assets through a going concern sale, thereby preserving value by ensuring business continuity. Used appropriately, pre-pack sales avoid the costs of a trading administration, save jobs and often result in higher returns for creditors than would be achievable in alternative insolvency processes. Pre-pack sales represent around 29 per cent of all administrations.1

Why reform pre-pack sales?

The inherent lack of transparency of pre-pack sales can be a source of criticism, although predominately in the SME market. Unsecured creditors of the company in particular will not receive prior notice of the pre-pack sale and so can feel disenfranchised from the process.

The perception of a lack of transparency can be heightened when the sale is to a connected party (i.e. someone who was involved in the insolvent company, such as a director or shareholder). This can reinforce the view of creditors with little hope of meaningful recovery that the purchaser is ‘asset stripping’ the company by transferring valuable assets out and leaving the liabilities behind.

Given that sales to connected parties account for roughly half of all pre-pack sales, the Government has recognised the importance of ensuring that creditors have confidence in the process.