Government proposals will mean that creditors will receive notice of proposed sales to a connected party
UPDATE 27 January 2012: The Government announced in a written answer in Parliament yesterday that it will not be going ahead with these proposals.“Pre-pack” administrations involve the sale of all or a significant part of a company’s business being lined up before the company goes into administration, with the sale of the business then completed immediately after the start of the administration. The advantage of a pre-pack is that it minimises disruption to the business and uncertainty for employees and suppliers. This contrasts to the process of marketing the business and negotiating its sale during the administration, which process can be lengthy and can see the departure of employees, suppliers and customers, so lessening the value of the business.
The disadvantage of a pre-pack is that, if it involves the sale of the business to a connected party – such as the shareholders or directors of the failed company (a “phoenix” sale) - the administrator may, for various reasons, not realise the full value of the business. This may be because of information asymmetry between the connected party and the administrator, or it may result from a relationship or implicit understanding between the administrator and the connected party.
Two new measures
BIS recognises that pre-packs offer a “flexible and speedy” means of rescuing a company, but is keen for them to be done “fairly and reasonably”, with creditors and competitors not being disadvantaged by a sale of the business at an undervalue.
- Notice of sale to creditors: To improve the transparency of the pre-pack process, BIS is to require administrators to give notice to creditors when they propose to sell a significant proportion of the assets of a company or its business to a connected party, in circumstances where there has been no open marketing of the assets. Creditors will be able to express concerns to the administrator, or to make a higher offer for the assets, or possibly apply to the court for injunctive relief. These new requirements will apply to pre-packs and to any sales back to connected parties in an administration where there has been no open marketing of the assets.
- Wider availability of SIP 16 explanation: Administrators already need to provide to creditors a detailed explanation of why a pre-pack sale was undertaken, in compliance with Statement of Insolvency Practice 16, which can be accessed here. In future, these explanations will need to be included in their administration proposals which are lodged at Companies House. The result will be that this information will be available to suppliers and creditors and business as a whole. Administrators will also need to confirm that the sale price represents, in their view, best value for creditors.
No timetable for the implementation of these measures is indicated in the BIS announcement.
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